DroneShield Ltd (ASX: DRO) shares are starting October around $1.70 after a jump on the final day of last month.
Investors were buying the counter-drone technology company's shares after it was awarded a major US procurement vehicle.
Does that make the shares a buy in October?
I think so, although investors need to be comfortable with plenty of volatility.
Image source: Getty Images
What does the US win actually mean?
DroneShield has been awarded an Indefinite Delivery, Indefinite Quantity contract supporting the US Joint Interagency Task Force 401 Domestic Shield initiative.
The vehicle has a maximum value of US$500 million over three years and is designed to provide a streamlined way for the US government to procure DroneShield's counter-drone capabilities.
Importantly, that does not mean DroneShield has suddenly booked US$500 million of revenue.
Individual orders still need to be awarded under the agreement, and DroneShield says it will announce material orders as they occur.
For me, that distinction is important, but it does not take away from the significance of the announcement.
DroneShield has already delivered DroneSentry-X Mk2 systems in support of JIATF-401 requirements, including systems that have been installed and accepted on US military vehicles. The new agreement gives the company another pathway to supply its technology as the US expands counter-drone protection across military installations and other priority locations.
That is the sort of relationship I want to see developing.
The valuation is demanding
One thing that can't be ignored is DroneShield's valuation.
Consensus forecasts currently point to earnings per share (EPS) of around 1 cent in FY28.
At a $1.70 share price, that would put DroneShield shares on a PE ratio of roughly 170 times forecast FY28 earnings.
That is clearly expensive by almost any conventional measure. But I am not convinced that figure tells us everything about the company's longer-term earnings power.
DroneShield is still investing heavily to become a much larger business. That includes manufacturing capacity, research and development, sales operations, and its international footprint.
Those costs can constrain reported earnings today while potentially creating the capacity to generate much more revenue later.
If US defence demand accelerates and DroneShield converts procurement vehicles like this one into substantial orders, I think profits could eventually scale much faster than the current EPS forecast suggests.
Why I would still buy
Counter-drone technology is becoming increasingly important as cheap and readily available drones change the nature of warfare and create new security challenges.
DroneShield is positioning itself directly in that market with technology spanning detection, electronic countermeasures, command and control, and sensor integration.
The latest US agreement gives me more confidence that its products are gaining traction with a strategically important customer.
But I would expect the journey to be bumpy. Defence contracts can be large and irregular, expectations around DroneShield are already high, and a valuation of around 170 times FY28 forecast earnings leaves little room for disappointment.
Foolish takeaway
I would buy DroneShield shares around $1.70, but I would go in expecting volatility.
The current earnings numbers make the shares look extremely expensive. For me, though, the bigger question is what earnings could look like once today's investment starts translating into a much larger order book.
The new US procurement vehicle does not guarantee that outcome, but I think it strengthens the case that DroneShield has a genuine opportunity to become a much larger defence technology business.
