AeroVironment vs. Red Cat Holdings: Which Drone Stock Is a Better Buy?

Tech stocks that have the potential to disrupt the market and may help you derive outsized gains. In the last few years, several companies are looking to streamline the delivery or supply chain services space. This has increased investments in firms that are developing drone technologies.

According to a report from Statista, the global commercial drone delivery market is forecast to touch $58.4 billion in 2026, up from $27.4 billion in 2021. It indicates the market is expected to grow at an annual rate of 16% in the next five years, making companies such as AeroVironment (AVAV) and Red Cat Holdings (RCAT) solid bets for growth investors.

Let’s see which of these two stocks are better poised to outpace the broader market given current valuations and other financial metrics.

AeroVironment stock is up almost 40% in the last year

A company valued at a market cap of over $2 billion, AeroVironment designs, develops, produces and supports a portfolio of robotic systems and related systems for government agencies and businesses. It has two business segments that include Unmanned Aircraft Systems (UAS) and Medium Unmanned Aircraft Systems (MUAS). AVAV supplies UAS as well as tactical missile systems to organizations part of the U.S. Department of Defense and other allied governments.

AeroVironment is expanding its portfolio of products by enhancing artificial intelligence or AI capabilities to gain traction in the robotics space as well. In early 2021, it announced the acquisition of Arcturus UAV which will allow it to gain a foothold in the larger drone-based aircraft vertical.

The stock has returned close to 40% in the first nine months of 2021 and is up 272% in the last five years. AeroVironment has increased sales from $271 million in fiscal 2018 to $395 million in fiscal 2021 (ending in April).

Analysts expect sales to grow by 44% to $569 million in fiscal 2022 and by 11.3% to $633.29 million in fiscal 2023. Its adjusted earnings per share is forecast to improve from $2.1 in fiscal 2021 to $3.09 in fiscal 2023, valuing AVAV stock at a forward price to sales multiple of 3.8x and a price to earnings multiple of 33.2x which is quite reasonable.

Its revenue backlog, which indicates future sales, rose by 20% on a sequential basis to $258 million at the end of fiscal Q1.

Red Cat Holdings is a micro-cap stock

A much smaller player compared to AeroVironment, Red Cat Holdings is valued at a market cap of just $176 million. Red Cat Holdings designs, manufactures, and sells drones and related

components through its e-commerce platform. The company also offers Dronebox which is a cloud-based analytics, storage and blockchain-based solution that records and analyzes flight data and information from a drone.

Wall Street expects Red Cat to increase sales from $5 million in fiscal 2021 to $39 million in 2023. Its bottom-line is also forecast to improve from a loss per share of $0.03 to earnings of $0.31 in this period.

We can see that Red Cat stock is valued at a forward price to 2023 sales multiple of 4.5x and a price to earnings multiple of just 10.6x.

The verdict

While still unprofitable, Red Cat Holdings is positioned to deliver adjusted profits in the next 12-months. Its top-line is also forecast to grow at a far higher pace compared to AeroVironment, which, in my opinion, currently makes Red Cat Holdings a better investment. However, investors should also note that Red Cat is far smaller in size, leaving it vulnerable to macroeconomic shocks.

RCAT shares were trading at $3.29 per share on Monday morning, up $0.01 (+0.30%). Year-to-date, RCAT has gained 9.67%, versus a 16.95% rise in the benchmark S&P 500 index during the same period.

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.

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