Kerrisdale Capital – Red Cat Holdings, Inc. (RCAT) Flying Blind – sUAS News

We are short shares of Red Cat Holdings, a $1 billion drone manufacturer that’s added more than $900 million in market capitalization over the last 9 months mostly in anticipation of an award for the production of the US Army’s short range reconnaissance (SRR) drone and the supposedly massive market opportunity unlocked by such a high-profile endorsement.

But expectations for both the SRR contract size and the potential for follow-on sales bear almost no
relationship to reality.

Army budget documents clearly delineate an SRR budget for 2025 of just under $25 million, and an expectation of about the same in the medium term. The Army also intends to refresh the SRR model every 2-3 years while remaining open to switching contractors. That contrasts sharply with Red Cat management’s crafty portrayal of a sole-source contract worth close to $400 million over 5 years, and $80 million in 2025. Investors should also consider that Red Cat preemptively announced the program win without the Army’s permission, weakening its position in contract negotiations and even, in a worst-case scenario, endangering the award.

Red Cat’s depiction of a huge follow-on market consisting of the other US military services, US government agencies, and US-allied militaries is also a fantasy. The Air Force has little infantry and thus little use for an infantry drone, and the Marines and Coast Guard have preexisting drone programs. The only other relevant government agency is Customs and Border Patrol, and its budget documents indicate near term drone procurement of just $1 million. Meanwhile, management has been talking about massive imminent drone sales to NATO allies for the last 3 years with nothing to show for it, which could be because European militaries are more inclined to modify cheaper and better Chinese drones or because there’s an array of smaller homegrown European drone suppliers already supplying these customers.

Just like those elusive NATO contracts, Red Cat has been setting near-term deadlines for a “mass production” facility since 2022, but having devoted almost no capex to one, still can’t manufacture large quantities of drones. 2025 guidance, though, assumes that Red Cat will produce 3 new drone models, each at triple the speed of the company’s historical best seller.

One of those new drones, the Edge 130, comes to Red Cat through a 2024 acquisition and has never been produced as more than a prototype.

Red Cat’s declarations and projections rarely materialize, and we believe the same will be true of both the company’s 2025 guidance and the parameters of the SRR contract. Almost immediately following the SRR win, two key executives – including George Matus, the brains behind the SRR-winning drone – resigned and sold most of their stock. Share sales have also been made by other insiders. Having set almost impossible expectations, Red Cat is set to be blown out of the sky.

Read the full Kerrisdale Capital report.

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