Investing.com -- Red Cat Holdings Inc. (NASDAQ:RCAT) shares fell 9% after the company was mentioned as a short position by Kerrisdale Capital. The firm expressed skepticism regarding Red Cat's market opportunity and contract expectations with the US Army, which sharply contrasted with the drone manufacturer's public statements.
Kerrisdale Capital's report highlighted that Red Cat's portrayal of a nearly $400 million sole-source contract over five years for the US Army's short-range reconnaissance (SRR) drone was highly overstated. According to Army budget documents, the SRR budget for 2025 is projected to be just under $25 million, with similar expectations in the medium term. Moreover, the Army plans to refresh the SRR model every 2-3 years and remains open to changing contractors, which undermines Red Cat's claims.
The short-seller also cast doubt on Red Cat's assertions of a vast follow-on market, including other US military services, government agencies, and US-allied militaries. It was noted that the Air Force, Marines, and Coast Guard either have little need for an infantry drone or have existing drone programs. Additionally, Customs and Border Patrol's near-term drone procurement budget is reportedly only $1 million. Kerrisdale also pointed out that despite Red Cat's claims of imminent drone sales to NATO allies over the past three years, there has been no evidence of such sales materializing.
Furthermore, the report criticized Red Cat's capacity to fulfill its production promises. Despite announcing the need for a "mass production" facility since 2022, the company has not made significant capital expenditures to establish one. Kerrisdale also questioned the feasibility of Red Cat's 2025 guidance, which assumes the production of three new drone models at a rate three times faster than the company's historical best-seller.
The skepticism from Kerrisdale Capital comes as Red Cat faces internal challenges, with two key executives, including George Matus, resigning and selling most of their stock shortly after the SRR contract win. These developments have raised concerns about the company's ability to meet its ambitious projections and maintain its market valuation.
The decline in Red Cat's stock reflects investor concerns over the validity of the company's claims and its future performance in light of the critical report by Kerrisdale Capital.
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