AgEagle Aerial Systems (NYSEAMERICAN:UAVS) named J. Michael Drozd chief executive officer (CEO) of the company on May 1. On July 7, Drozd issued a letter to shareholders. In the three months since his hiring, UAVS stock has increased in value by 129%.
As I write this, the drone business is trading at 34 times its total assets. By comparison, Amazon (NASDAQ:AMZN), who knows a thing or two about drones and drone delivery, trades at a little more than six times assets.
Unless you’re a glutton for punishment, there’s an obvious choice if you’re intent on betting on the drone business, and it isn’t AgEagle.
Despite the more sensible play available to retail investors, Robinhood customers are jumping at the chance to own the company’s stock. According to Bloomberg, the number of the trading platform’s account holders investing in UAVS stock has gone from 10,000 in early April, to more than 50,000 in mid-July. Not bad for a company that had $391,280 in revenue in the first quarter.
Now, to be fair to the company, its first quarter of 2020 sales did increase 751% year-over-year, but you’re still taking a giant leap of faith that the new CEO can deliver the goods.
Maybe He Can, Maybe He Can’t
To help the company get to the next level, it announced August 5 that it’s selling stock and warrants worth $10 million to an existing shareholder. The warrants are good until June 6, 2021, and have an exercise price of $3.30 a share. Exercisable any time after Feb. 6, 2021, the shares from the exercise of warrants would generate an additional $8.3 million in gross proceeds.
If exercised, the capital raise is for more than $18 million, or more than four times its current assets. It plans to use the funds for general corporate purposes, including the investments required to get its new manufacturing facility in Wichita up and running.
There’s no question the existing shareholder stepping up is a shot in the arm for the company. The big unknown is whether the good news will last.
Looking at Drozd’s shareholder letter, it’s clear he’s got the company focused on three potentially lucrative industry sectors. It’s also clear that the CEO has the kind of background necessary to grow AgEagle’s business. That’s all very good.
However, the $18 million it just raised is going to disappear in a heartbeat. Jeff Bezos spends more on vacation real estate. It’s not going to be easy scaling the business to become profitable.
UAVS Stock Rests on a Purchase Order
InvestorPlace’s David Moadel discussed this very subject in late July. I’ll get to that in a moment.
On April 15, the company announced that it received a follow-on order from an existing client.
“[T]he expansion of scope for its contracted commercial drone work through the receipt of follow-on purchase orders from a major ecommerce company,” AgEagle’s press release stated.
“Representing significant new revenue, the new purchase orders relate to the continued manufacturing and assembly of drones used for the testing and refining of the client’s commercial drone small package delivery vehicles, systems and operations currently in development.”
My colleague’s July 28 article suggested that he thought the purchase order was indicative of the company’s seriousness to move beyond the agricultural arena.
“So, AgEagle seeks to flex its drone-making chops beyond the agricultural sphere. That’s not a terrible idea. Undoubtedly, the novel coronavirus pandemic has bolstered the package-delivery market substantially,” Moadel wrote.
“Yet, the company isn’t just expanding into a new sub-niche. It’s also expanding geographically.”
You’ll get no argument from me. It’s clear Drozd, and Barrett Mooney, the former CEO and now chairman of AgEagle are sold on package delivery.
The only thing that concerns me is that the wording of the April press release seems to suggest that the proprietary portion of the drone manufacturing lies on the client’s end and not AgEagle. In other words, it’s merely a glorified assembly plant.
However, if the e-commerce company turns out to be Amazon as The Wichita Eagle speculated in mid-July, that’s a whole different kettle of fish.
The Bottom Line
I’m conflicted about AgEagle’s pivot from agriculture to package delivery.
On the one hand, the world continues to move to e-commerce. Covid-19 cemented this secular trend. On the other hand, the agriculture industry needs all the help it can get. Drone-delivered data to help farmers be more productive and efficient is not something that’s going to go away. Someone will jump into this space, and AgEagle’s place will be lost forever.
Its pivot remains a big gamble.
At $1.50, I’d say go for it. At $3.25, the risk-to-reward isn’t nearly as attractive. If you’re an aggressive investor and can afford to lose it all, I don’t think you need to wait. If you’re risk-averse, I’d wait for it to fall back to $2.50.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.