Announcement of New Motor Product Increases TAM by Roughly 50% – sUAS News

Analyst: Barry M. Sine, CFA, CMT – Litchfield Hills Research

This week Unusual Machines announced an order for drone motors from Red Cat (RCAT – NASDAQ).
The company had not previously announced this product, and it is not yet on the Defense Department’s
Blue List of approved drone components for military use. With this announcement, the company’s total
addressable market in terms of announced components increases by 50% and it can now provide 64% of
the components for a typical mid-sized drone, increasing its TAM by roughly 50%, from $1.3 billion to $1.9 billion.

We also note that per a check of the Blue List website, a second Unusual Machines flight controller has now been added. Management has also been quoted in the press that it has radio receiver and video receiver components nearing introduction, which would increase its TAM another 30%. This would leave
the frame, which is relatively low-tech, as the only major unannounced component required to build a drone.

The company has been able to rapidly introduce new products this year as it is working with partners to
design and manufacture the components. For example, Ewing Aerospace designed and manufactures its
flight controllers and the motors announcement with Red Cat states that the companies will initially use a
partnered production facility. UMAC only has 16 employees, so it is leveraging its workforce through
effective use of third parties.

But using contract manufacturers, it can rapidly ramp up production, with little cost and without the financial risk of taking on the fixed cost of building its own factories. We think it will in time have its own internal production capabilities, but only when it can reasonably assure itself that these facilities will be sufficiently utilized to at least cover fixed overhead expenses. It recently announced the hire of a manufacturing executive who worked at Tesla’s Fremont factory during its production ramp.

The other major positive is that the company’s retail unit, Rotor Riot, can now vertically integrate sourcing
components internally and significantly expand its gross margin.

We reiterate our Buy rating and $20 12-month price target as we see a number of upcoming
catalysts:

1. Introduction of a radio receiver/transmitter (RX) product, further increasing its TAM.
2. Introduction of a video receiver/transmitter (VTX) product bringing its addressable market to 84%
   of the value of building mid-sized drones.
3. Blue List certification of its motors.
4. New customers and orders for components.
5. Q4 earnings in late March. We look for strong retail sales revenue, based the company’s sales
   promotions (eg, a $499 Pro Starter drone kit) and our visit to the Rotor Riot offices in December.
   Q4 should also show some initial, minimal orders for components as the company had
   announced its Brave 7 flight controller product and a major customer then. Our Q4 estimate calls
   for retail revenue of $2 million and components revenue of $100k, for total revenue of $2.1
   million. This would bring revenue for the year to $5.7 million, ahead of loose guidance for at least
   $5 million.

NYSE: UMAC

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Feb 27, 2025 4:03 PM ET

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