Is AgEagle Aerial Systems a Buy Under $3?

I last wrote about AgEagle Aerial Systems (NYSEAMERICAN:UAVS) in early August. At the time, I recommended that risk-averse investors interested in buying UAVS stock wait until it drops into the mid-$2s before pulling the trigger.

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I also said that aggressive investors willing to lose their entire investment needn’t wait for it to drop below $3 to buy. As I write this, UAVS is trading around $2.75 a share. If you’re an aggressive investor, it’s time to pull the trigger.

If you’re a risk-averse investor, your entry point is getting closer. However, for margin-of-safety purposes, I might still wait for it to fall a bit more before buying. Here’s why.

What’s the Difference Between $2.50 and $2.75 for UAVS Stock?

Assuming AgEagle becomes a booming success over the next three to five years, there’s absolutely no difference between the two prices, which is why I suggested aggressive investors pull the trigger today.

However, if you’re a risk-averse investor, you’re not going to like what happens to its share price if it reports disappointing third-quarter results in November. In August, AgEagle’s second-quarter results were disappointing, sending its stock down more than 10% on Aug. 18, the day after releasing its earnings. A repeat performance for its stock is likely in November if it fails to live up to investors’ lofty expectations.

However, AgEagle’s revenues did increase by 516% in the six months ended June 30, with a 34-percentage point increase in gross margins. Sure, its losses increased over the same period a year earlier, but that had everything to do with its shift in long-term growth strategies and little to do with its operational performance.

As it moves to a drone-focused business model, its operating expenses are going to be higher for the foreseeable future. There’s no escaping this reality. If you’re worried about its long-term ability to make money, you better walk away now.

InvestorPlace’s Ian Bezek recently discussed the company’s disappointing earnings. He points out that $770,000 in revenue that would have been booked in the second quarter had to be pushed to the third quarter due to pandemic-related inventory shortages.

“As long as these sales do in fact occur in the coming months, AgEagle. will still have made progress. The company hasn’t topped $500,000 of sales in a single quarter before, so $800,000 or $1 million of revenue would be quite a jump,” Bezek wrote on Sep. 8.

If you’re an aggressive investor, any disappointment in November might cause you to average down on your bet. For the risk-averse investor, if AgEagle fails to hit $800,000 in revenue, the 10% drop in August is going to be a walk in the park.

Importantly, Bezek finished his column by suggesting nothing in the second quarter revealed a company that’s turned the corner. So, until investors get the third-quarter numbers or an official announcement about a partnership with Amazon (NASDAQ:AMZN) happens, I still don’t see AgEagle being ready for prime time.

Why Wait?

Let’s assume that UAVS stock falls 20% on disappointing Q3 2020 earnings in November. Let’s also assume that it trades in a tight range between $2 and $3 until then. At the midpoint of $2.50, a 20% drop in its share price would bring UAVS to $2 or lower by the time it reports in November.

Without a catalyst to drive it higher, I have a hard time seeing it going on any run over the next couple of months, which means investors will continue to get opportunities to buy its stock under $3.

The report in November, while important, isn’t going to be a make-or-break quarter. As my colleague stated, AgEagle had $25 million in cash on its balance sheet at the end of the second quarter with no long-term debt. Its finances are such that it can withstand several quarters of cash burn without having to approach the credit and equity markets for additional funds.

Long term, the focus should be on building one revenue stream that is sustainable well into the future. Chief executive officer Michael Drozd and the board appear to be committed to the drone business, and that’s fine by me.

As I said at the top, if you’re an aggressive investor, I see no problem buying at current prices.

If you’re risk-averse, the buy point gets much trickier as we move closer to November earnings. My gut tells me that you ought to wait for the report’s release or a catalyst-type announcement, whichever comes first, before buying its shares.

Only then will UAVS stock fly up, up, and away!

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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.


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