DroneShield: The Answer To Killer Robots

This is the author's opinion only, not financial advice, and is intended for entertainment purposes only. The author holds a beneficial long position in DroneShield Limited (DRSHF).

The Emerging Need For Counterdrone Systems

In 2017, the nonprofit Future of Life Institute released a disturbing video to draw attention to the dangers of cheap, small, weaponized drones. This 2017 dystopia is already a reality today. Small unmanned aerial systems (small UAS), which can autonomously track people using AI (for example, to film them in motion), now cost only a few hundred dollars and can be easily modified to spread terror on today's battlefields. The scientific journal Nature asked in April 2024 "Lethal AI weapons are here: how can we control them?", the New York Times recently titled "AI begins ushering in an age of killer robots", and the German magazine Der Spiegel followed a few days later with a similar article "The update of killing". Now that public awareness of the dangers of drones is growing rapidly, calls for adequate drone defense will not be far behind.

Beyond the potential malicious use by terrorists, drones are transforming the capabilities of any criminal enterprise: burglars can spy on properties, "activists" can sabotage industrial projects, drug dealers and smugglers can use them in their logistics - the potential use cases are endless. In 2021, for example, criminals in Italy used a drone to smuggle a firearm into a prison.

As a result, there will be few important structures in the future that can afford to go without adequate counterdrone measures - counterdrone systems will proliferate just as drones have proliferated. As a result, the market for such systems is expected to explode over the next few years. The impressive stock performance of Australian counterdrone systems manufacturer DroneShield Limited provides a glimpse of this trend.

From Start-Up To NATO Supplier

DroneShield started 10 years ago with acoustic drone detection systems using Raspberry Pi backends. Today, the company offers highly complex multi-sensor systems that use AI to detect thousands of different types of drones. In addition, DroneShield has expanded its portfolio to include non-kinetic systems to neutralize drones. But it is only recently that this story has really taken off: Over the past 12 months, DroneShield has steadily received orders from government agencies, with the U.S. being DroneShield's largest market (approximately 70% of revenues in 2023). In late 2023, Australia supplied the company's counterdrone systems to the Ukrainian armed forces. On April 17, 2024, NATO awarded DroneShield the first procurement framework contract for counter-small unmanned aircraft systems (C-UAS) in the organization's history.

Given the stock's performance over the past 12 months, is it too late to invest now? In a fascinating one-hour interview with Frazis Capital Partners published on YouTube on May 30, 2024, DroneShield CEO Oleg Vornik discusses his expectations for the future:

“Counterdrone systems in any meaningful way only existed for maybe last 5 years because counterdrone is a derivative industry to the drones themselves. So as a result people really been buying it for last couple of years in any meaningful amounts so nobody has nowhere near enough. So it’s just the fact that government procurement cycles are very long and they only started recently so with that the path is set mass acquisitions and we think that over the next 12 to 24 months we’re going to see those large purchases coming in.”

DroneShield's Technology

DroneShield offers a wide arsenal of counterdrone products: The body-worn RfPatrol Mk2 warns soldiers of drones in real time, various versions of the DroneGun enable rapid neutralization of drones, and systems such as DroneSentry or DroneCannon can be used to equip and protect vehicles or even shield entire areas. DroneShield's multi-sensor drone detection systems are combined with cutting-edge AI solutions capable of identifying all types of drones, which are marketed on a Software-as-a-Service (SaaS) model. Drone neutralization products, such as the DroneGun Mk4 or DroneCannon, use non-kinetic jamming to disrupt the communications of a single or multiple drones (or even swarms) using an appropriate radio frequency band, forcing them to land or return to their launch site.

Jamming is currently considered the most economical and versatile countermeasure against small drones. A frequently cited shortcoming of this method would be the emergence of fully autonomous AI-controlled drones in the future, with no communication that could be disrupted by jamming. To date, inexpensive small drones are still remotely controlled by humans, at least in the final, decisive phase of their attack, and even when flying long distances without human control, most drones still rely on satellite positioning. Small, fully autonomous drones that can reach precise targets over long distances may be technically possible, but they are also orders of magnitude more expensive in the near future. Drones are primarily a tool of asymmetric warfare: the rationale behind the use of small commercial drones is that a weapon costing a few thousand dollars can be used to destroy a target such as a multi-million dollar tank. Using a drone that costs several hundred thousand dollars loses its asymmetric advantage. Inexpensive drones that autonomously follow a strictly defined path are not really modern drones at all. Such weapons were neutralized decades ago: The British, for example, were able to shoot down nearly 80% of the autonomous V1 flying bombs used by the Nazis in World War II.

However, low-cost, fully autonomous, AI-controlled drones are only a matter of time. Nevertheless, detecting these drones in the first place is critical, and DroneShield is a market leader in drone detection. If there is a need for systems that can neutralize drones that are immune to jamming, DroneShield is well positioned to be a key innovator.

To the best of the author's knowledge, DroneShield is the only publicly traded pure counterdrone play. Compared to its competitors, DroneShield has the most comprehensive portfolio with battle-tested performance.

Valuation

DroneShield recently announced explosive revenue and profit growth with a tenfold increase in revenue from AU$1.6 million to AU$16.5 million from Q1 2023 to Q1 2024. At the same time, DroneShield nearly doubled revenue from its Software-as-a-Service (SaaS) products over the same period. The company recently announced an annual hardware production capacity of AU$400 million. In addition, the company reported a contracted backlog of AU$27 million and a pipeline of AU$519 million.

In order to continue its expansion and add new production capacity, DroneShield sought to raise AU$70 million in April 2024 through a fully underwritten placement at AU$0.80 per share; investor support was so strong that the company was able to raise AU$100 million. Prior to this capital raise, DroneShield reported a strong cash position of AU$56.4 million and no debt as of March 31, 2024. The current estimate of annual revenues for 2024 by two analysts is around AU$100 million; with a current market cap of approximately AU$1.5 billion, DroneShield would be valued at 15x revenues. Given the recent revenue growth, this would still be a justifiable valuation.

Risks

Potential risks may include: DroneShield may not be able to secure contracts from the reported pipeline of AU$519. In addition, supply chain bottlenecks and lower than expected production capacity could negatively impact the company's future revenues. Low-cost, fully autonomous, AI-controlled drones that are immune to DroneShield's non-kinetic jamming technology could also emerge sooner than expected. However, this would affect all competitors equally; to the author's knowledge, no counterdrone system manufacturer currently offers non-kinetic systems against such fully autonomous drones. Competition in general could increase, especially if larger defense contractors with significant market power increasingly offer their own counterdrone systems.

Concluding Summary

Thanks to innovators like DroneShield, we are no longer defenseless against killer robots. With the rapid proliferation of small drones on today's battlefields, the need for counterdrone systems is beyond question. DroneShield's battle-proven technology is backed by the United States and has a good chance of becoming a NATO counterdrone standard. If DroneShield succeeds in this far from saturated market, the stock has plenty of upside potential despite its explosive past performance.

Follow me on X for frequent updates (@chaotropy).