As the world pushes for newer, innovative tech, there are many ways to invest in the future. Recently, autonomous drone stocks have yielded handsome returns. Mysterious drone sightings in the Northeastern U.S. helped drive this. Two companies working closely in this space are Red Cat (NASDAQ: RCAT) and Palladyne AI (NASDAQ: PDYN). Shares have risen 268% and 503%, respectively, in the past three months as of the Jan. 2 close. I’ll reveal what’s behind the rally for these two names and provide perspective on what to watch next.
Red Cat: Key U.S. Army Deal Sends Shares to The Moon
Red Cat stock has soared in 2024 for several reasons. First, the company has signed several contracts to provide drones for military purposes. The first was a $2.5 million deal in March to provide two North Atlantic Treaty Organization (NATO) members with its Teal 2 drone systems. In September and October, the company announced about $4.5 million in deals and awards from the U.S. government.
However, shares went ballistic after the company announced that the U.S. Army selected it as the winner of the Short-Range Reconnaissance (SRR) Program of Record. This is a huge achievement but also a tall task. The company now must produce an average of nearly 1,200 drones a year to meet the Army’s acquisition target of 5,880 systems over five years. The company is now guiding for $100 million of revenue in calendar year 2025 at the midpoint. That is over six times higher than the revenue it generated over the last 12 months. It will need to produce a massively larger number of drones to meet that goal, which brings operational risk. Nonetheless, the deal puts significant legitimacy behind Red Cat. It can use this to expand further if it fulfills its end of the bargain.
The company wasted little time in making progress to fulfill its obligation. The company is partnering with AI darling Palantir (NASDAQ: PLTR), a key intelligence community partner. Red Cat will utilize Palantir's Visual Navigation software (VNav) in its Black Widow drones. The technology will allow the drones to navigate war environments without GPS. This mitigates the effects of electronic warfare devices used to jam and interfere with the drones' navigation system.
Red Cat will also use Palantir's Warp Speed manufacturing software when building its drones. The goal is to optimize production, streamline the supply chain, and assure quality. Ultimately, it hopes this can drive lower costs and improve margins. It's good to see this. The company must ramp up production efficiently to meet its five-year goal without incurring huge losses.
Palladyne AI: Riding Red Cat’s Coattails Through Software Partnership
Another company that has been surging recently is Palladyne AI. Shares also began skyrocketing in the days after the Red Cat SRR deal. It's no wonder, considering the two firms announced an expansion of their partnership the day after the SRR deal. Palladyne's Pilot AI will be available on Red Cat’s drones to customers who want it, including those delivered through the SRR deal. The software provides several key benefits. First, it allows for “persistent detection, tracking, and classification of objects of interest." Ultimately, this improves the drone’s ability to gather relevant military information autonomously.
The software also provides shared situational awareness across a fleet of drones working on the same mission. By being able to communicate, drones can efficiently spread their resources over a particular area. This improves their ability to collect as much valuable information as possible. It also helps combine data from multiple types of sensors on a drone. This includes data from infrared sensors that track heat signatures and standard video sensors. This helps the drones make better decisions.
The company demonstrated the efficacy of its technology in late December, sending shares even higher. It completed the first successful flight of a third-party drone that autonomously identified, prioritized, tracked, and followed the desired target.
What’s Next for Red Cat and Palladyne?
With both firms having very small amounts of historical revenue, both prospects largely rely on the SRR deal. They will need the deal to go smoothly to justify the massive increases in their valuation. Closely monitoring the two firms and dissecting management commentary is essential to understanding whether everything is going according to plan. Additionally, Red Cat will need to raise capital to fund its production. The company is working to win Department of Defense loans. This would be much more preferable to issuing new shares.