With many short sellers discussing the rumor of a partnership with Amazon.com, Inc. (AMZN), AgEagle Aerial Systems (UAVS) continues to deliver good results besides making meaningful acquisitions. In the last quarterly earnings, the company reported quarterly sales of $1.7 million, four times more than that in the same quarter in 2020. UAVS also reported more than $25 million in cash, and it is working with Stifel and Raymond James to sell up to $100 million in stock. If the AgEagle Aerial Systems obtains $100 million, I wouldn’t expect the share price to decline a lot. This is a warning for short sellers: Be very careful with the stock.
Business Model And Recent Increase In The Share Price
Founded in 2012, AgEagle Aerial Systems Inc. is a designer and producer of small, unmanned aerial vehicles.
Source: Company’s Website
Among the company’s products and services, I would highlight the proprietary drones designed by UAVS: the AgEagle RX-60 model and the AgEagle RX-48 drone. I don’t think the short sellers out there took the time to study the company’s drones. I reviewed some of the comments made by agriculture experts. The drones are sold by independent sales representatives all over the internet.
I reviewed some drone forums. Users have discussed the company’s products and provided good feedback. The company has a business model that has worked well for more than nine years. Even if the company does not reach an agreement with Amazon, revenue growth could be substantial in the coming years:
Source: UAV Coach Community Forum
The Increase In The Share Price And Target Market
With significant expertise in the agriculture industry, in 2019, the company entered the Drone Logistics and Transportation market with an order from a major ecommerce company. I believe that investors need to read the following lines. They are relevant to understand the most recent price dynamics:
In the third quarter of 2019, AgEagle announced that it had begun to actively pursue expansion opportunities within the emerging Drone Logistics and Transportation market and revealed that it had received its first purchase orders from a major ecommerce company to manufacture and assemble UAVs designed to meet the critical specifications for drones that are meant to carry packaged goods in urban and suburban areas. Source: SEC
Most investors know the company because of rumors that emerged about the e-commerce operator, which was not Amazon (AMZN). The information made the stock price spike up:
But, that’s not all. The expected market opportunity in the global UAV drone market was also responsible for the increase in UAVS’s valuation. Experts foresee a market that will grow at a CAGR of more than 19% from 2020 to 2027.
Source: Global UAV Drone Market
If we look at the transportation market, the market growth appears to be larger than the global drone market. According to Insider Intelligence, total global shipments will reach 2.4 million in 2023, growing at a CAGR of 66.8%. With these figures in mind, the increase in the company’s share price doesn’t look absurd. Short sellers who are calling the company a pump and dump need to study carefully the information delivered by experts in the market:
Source: Drone Industry Analysis 2021
Of course, I believe that the company didn’t do good when it mentioned large organizations in its business communications. Large operators may benefit from the company’s activities in the future. However, I don’t see why UAVS used their images and logos in its presentations. Mentioning a contract with an e-commerce player and giving all these names did create certain uncertainty. With that, the company cannot control what traders do with all the information in the social media.
Source: Company’s Website
The Financial Situation Is Getting Better With The New Acquisitions
On March 31, 2021, UAVS reported $24 million in cash, and total assets of $53 million. The total amount of assets increased by 86% as compared to the figure reported in December 2021. The new goodwill registered after the recent acquisitions was responsible for the increase in assets. If the company continues to release asset increases, I believe that more investors will take a look at the company’s business model. As a result, liquidity in the market may increase again:
UAVS’ asset/liability ratio is equal to 3.5x, so most investors will not worry much about the company’s financial obligations. UAVS does not have financial debt. The company financed its most recent acquisitions thanks to liabilities related to acquisition agreements. It means that the sellers received debt when they sold their companies, which is very positive. They believe in the business profile and the future of UAVS.
UAVS bought subsidiaries of large players in the drone market, which offers a lot of credibility. UAVS made an agreement with Parrot (PAOTF) to acquire MicaSense, Inc:
On January 26, 2021, through our wholly-owned subsidiary, AgEagle Sensor Systems, Inc., we acquired 100% of MicaSense, Inc. from Parrot Drones S.A.S. and Justin B. McAllister. MicaSense’s high performance proprietary products, including Altum™, RedEdge-MX™, RedEdge-MX Blue™ and Atlas Flight™, have global distribution in 70 countries. Source: 10-k
Notice that the UAVS agreed with Patron a customary working capital adjustment. Parrot presents itself as the european leader in professional drones. If Parrot trusted UAVS, I believe that many investors will also trust UAVS:
The aggregate purchase price for the shares of MicaSense is $23,000,000, less the amount of MicaSense’s debt and subject to a customary working capital adjustment. The consideration is also subject to a $4,750,000 holdback to cover any post-closing indemnification claims and to satisfy any purchase price adjustments. Source: 10-k
Sales Growth Could Continue Thanks To The Company’s Cash In Hand
In the three months ended March 31, 2021, UAVS reported sales of $1.7 million. In the same period in 2020, sales were equal to $0.391 million. It means that sales growth is very significant, which may help justify that the company trades a bit expensive. I don’t think that short sellers did understand what a 334% q/q sales growth means:
It is a pity that few analysts are covering the company. We don’t have information about the expected revenue. Using previous revenue growth, I believe that the company could report Q2 sales of $3 million, $4 million in Q3, and $6 million in Q4. With the quarterly revenue figures obtained for 2012 and 2014, I believe that UAVS could reach these target sales and make annual 2021 sales of $14.7 million:
The company reported quarterly sales growth of more than 300%, so annual sales growth of 75% appears conservative. With 2021 sales of $14.7 million and assuming sales growth of 75%, I obtain 2022 revenue of $25 million. I believe that these numbers could make sense because the company has a significant amount of cash. UAVS has more cash to pay salaries as well as marketing and other operating expenses:
That’s not all. UAVS hired Stifel and Raymond James to obtain $100 million in cash. This is very exciting for two reasons. First, UAVS is working with large and well-known brokers. The fact that they accepted to sell shares of the company means that they believe in the future of the company’s business model. It is very positive. Besides, if the company can obtain $100 million more in cash, the potential for revenue increases. More cash means more employees, more marketing efforts, and most likely additional revenue growth:
Risks For Short Sellers: A Short Squeeze May Happen
Right now, short interest data reveals that shares shorted represent 15.49% of the total share count. In my opinion, if the company obtains $100 million in cash and continues to deliver 300% sales growth, a short squeeze could occur:
UAVS currently has an enterprise value of $318 million. With $100-$123 million in cash, approximately one third of the company’s enterprise value would be represented by cash in hand. If the company sells shares to obtain $100 million more, the share count would increase. With that, I wouldn’t expect stock dilution to be that bad. Investors need to understand that the company needs cash to grow.
If we assume an enterprise value of $300-$350 million and 2022 sales of $25 million, UAVS trades at 12x-14x sales. Large competitors are trading at 1.7x-20x with the median being 3x-5x. However, none of them reports larger sales growth than UAVS:
The peer group reports sales growth of 3%-83%. It makes sense that UAVS has a large EV/Forward Sales ratio because the company grows at a higher rate than its competitors:
If you are a shareholder, be ready for rapid swings in the share price. Making sales forecast is quite difficult. Besides, sales volatility can be expected. As a result, the company’s valuation may change quite a bit in the coming years:
The rapidly changing nature of the markets in which we compete makes it difficult to accurately forecast our revenues and operating results. Furthermore, we expect our revenues and operating results to fluctuate in the future due to a number of factors. Source: S-1
UAVS is still waiting for the United States to modify the regulation of small UAS for commercial use. I believe that we don’t see many drones flying around because governments have not approved them. If they never do, I wouldn’t expect UAVS to make significant revenue growth:
The regulation of small UAS for commercial use in the United States is undergoing substantial change and the ultimate treatment is uncertain. In 2006, the FAA issued a clarification of its existing policies stating that in order to engage in commercial use of small UAS in the U.S. National Airspace System, a public operator must obtain a COA from the FAA or fly in restricted airspace. Source: S-1
UAVS is not cheap at its current valuation. However, I don’t think that the company is very expensive either. With that, taking into account the current short interest, I believe that a short position is very risky. There are many things that could push the share price higher. First, the company expects to obtain $100 million in cash through the sale of equity. With $100-$125 million in cash and more than a 300% sales growth q/q, a market capitalization of $300-$450 million could be justifiable. Besides, if sales growth continues to be that high, market participants could easily justify 20x forward sales or more. To sum up, short sellers need to be very careful while dealing with UAVS shares.
Disclosure: We hold no shares and we were not paid to write the article.