I expect you’ve seen the latest twist to Russia’s depraved war on the citizens of Ukraine: the kamikaze drone. Just this week, dozens of bomb-carrying drones that explode when they crash into their target descended on Kyiv. Ukraine says these kamikaze drones have hit residential buildings and key parts of its energy infrastructure.
The damage is significant. Because these drones are small enough that they are difficult to identify and track with radar, standard missile defense systems are not terribly effective. And frequency jamming is useless because there is no signal from a remote operator to jam. These drones are pre-programmed with a destination and rely on GPS to find their target.
The main vulnerability is that they are loud and relatively slow (60-100 mph), so regular gunfire and line-of-sight missiles can shoot them down fairly easily. That’s why Russia has sent small swarms of these drones all with the same target – to increase the odds that they aren’t all shot down.
Still, Ukraine reports that at least five Ukrainians have been killed by kamikaze drones and that attacks on power stations have crippled its electrical grid.
Ukraine says these kamikaze drones are Iranian-made Shahed-136 attack drones. No surprise that Iran denies sending lethal military equipment to Russia for use in Ukraine. But as it happens, Iran has spent years developing its drone technology. Because Iran has been shut off from Western military technology for years, it had to become self-reliant on its air surveillance defense systems.
And drones are a pretty low-tech and effective solution for surveillance, which Iran relies on to monitor its borders as well as the world’s most important oil transportation waterway, the Strait of Hormuz.
But don’t forget that a strike on Saudi Arabian oil infrastructure a few years back was blamed on Iranian drone attacks.
Ukraine has made good use of drones for surveillance of Russian troops and targeting of tanks and other artillery for attack by howitzer and shoulder-launched anti-tank missiles. And back in April, Ukraine reportedly made use of a “drone swarm” to aid in the sinking of the Moskva, the flagship of Russia’s Black Sea fleet.
These Kamikaze drones will never be a significant part of any sophisticated military. They are mainly suited for guerilla-type activity, the kind you’d expect from local militias, insurgents, and terrorist groups.
So the fact that Russia – once a military superpower – has resorted to crude, bomb-carrying drones is telling. A sophisticated military would have the capability to use surveillance or tactical drones for targeting purposes, thereby maximizing the damage that munitions cause.
Because military targets move. A munitions depot or a group of heavy artillery could be in one place one day and another place the next day. The ability to track this movement is vital. These kamikaze drones can’t change targets once they are launched. Their use might suggest that Russia’s ability to track and strike actual Ukrainian military targets has been impaired.
In any event, kamikaze-style drones are a part of a much bigger trend toward automation in warfare, defense, and surveillance.
Eyes in the Sky
Obviously, automation means that machines replace humans in whatever possible and appropriate capacity. The large “Combat Drones,” the kind that can deploy air-to-surface and laser-guided missiles, along with “Reconnaissance Drones,” are probably the most recognizable aspect of defense automation.
Critical areas that might spring to mind include satellite imaging and communications. If there’s one thing that has really turned the tide against Russia and Putin’s attempt to take over the eastern areas of Ukraine, it’s satellite imaging and communications.
You may recall that months ago, Tesla (NASDAQ: TSLA) and SpaceX founder Elon Musk offered up the use of his Starlink satellite internet and communications network. Ukrainian mobile phone infrastructure has been essentially wiped out. Musk’s Starlink provides the only large-scale communications network in the country.
Starlink has allowed Ukraine’s decentralized forces (which often operate in small bands of 10-20 soldiers and volunteers) to communicate with each other, so they can coordinate attacks on Russian positions and also stay out of each other's line of fire.
Starlink has also meant that small drone operators can continue to use their cellphones to receive imaging from small drones that hobbyists and techies have adapted for use in the field. These drones were instrumental in the successful defense of Kyiv in the early days of the Russian invasion.
Ambarella (NASDAQ: AMBA)
Ambarella is a semiconductor company that specializes in fabricating the chips that make digital photography and imaging possible. Ambarella’s chips can be found across the spectrum of digital imagery, from consumer-level drones, cameras, and security systems to the most advanced military drones. These chips will also be important for self-driving vehicles and other automated machines where imaging is important.
Ambarella shares have been crushed over the last year like every other tech company. Ambarella’s share price peaked above $220 last December. Today it’s trading in the $50-$55 a share range.
Of course, just because a stock is down significantly doesn’t necessarily mean it’s a worthy investment vehicle for your money. And in fact, so long as inflation refuses to drop and the Fed keeps whacking the economy with giant 75 basis point rate hikes, the path of least resistance for tech stocks is going to be lower.
But with that said, Ambarella’s fundamentals are starting to look darned attractive.
Full-year 2022 revenue is expected to come in at about $342 million. Next year, analysts expect revenue to grow by 18% to $405 million. Ambarella’s current market value is just over $2 billion. So a forward price-to-sales ratio below 5 for a company with 18% revenue growth isn’t terrible.
Earnings estimates for 2022 have come down 13% in the last two months and 17% for 2023. It’s typical to see stocks exhibiting weakness while analysts push their earnings estimates lower. But, notably, Ambarella has beaten earnings estimates in each of the last 4 quarters.
The company has plenty of cash ($130 million) and virtually no long-term debt ($10 million), and the business generates $60 million a year in free cash flow. Once investors sense that analysts will start raising their earnings estimates, Ambarella shares will jump. To get an early read on when this might happen, pay attention to earnings press releases, especially the part about forward guidance.
A few years ago, I recommended FLIR Systems to my subscribers. The company is a leader in infrared and thermal imaging. Last year, FLIR Systems was bought out by Teledyne (NYSE: TDY) for a whopping $8 billion, an indication of how important the digital imaging sector is…
Ondas Systems (NASDAQ: ONDS)
Here’s a microcap that also caught my eye recently, at a $180 million market valuation and $3.80 a share, Ondas Systems is looking good.
Ondas makes private wireless networks for use with drones and surveillance equipment. The company’s base station radios connect with devices in the field, and are loaded with proprietary data processing software, cloud connection (for uploading and transferring data), as well as an AI-driven drone to complete the system.
Ondas’ systems can be used by utility companies to inspect long electrical lines, especially in remote regions. It can be used by railroad companies to inspect lengths of track and, in partnership with Siemens, for running automated trains.
Plus, Ondas’ American Robotics division has won FAA approval for automated industrial drones, which is a potentially significant opportunity.
But what really caught my eye was a recent acquisition. Ondas is buying a company called Airobotics (TASE: AIRO), which, in turn, is buying an Israeli-based company that specializes in automated counter-drone systems called Iron Drone.
Iron Drone is an automated system that can be integrated into radar systems and automatically deploy counter-drones when a drone threat is detected. It looks like Iron Drone would be a good solution for the kamikaze drones that are harassing Ukraine right now.
Here’s a pretty cool video of the system in action.
Ondas has only been a public company for 2 years. It’s essentially a start-up, so the company is just starting to make sales. But its tech looks promising.
Ondas has $30 million in cash. Not bad, but to ramp up production, the company is going to need more cash. It’s a terrible time for any company to sell bonds to raise cash. I suspect there will be a secondary offering of shares sometime in the next 6 months.
Now, secondary offerings are a pretty standard way for small companies to raise money. A company that needs cash, in this case, Ondas, can hire an investment bank that will then arrange for its clients to buy Ondas shares. The bank takes its commission from Ondas.
Two things to be aware of with secondary offerings: one, to incentivize the investors, a secondary offering almost always takes place at a discount to the current market price. So if Ondas is trading at $3.75, the secondary offering might be made at $3, a 20% discount.
As you might guess, Ondas’ publicly traded shares will very likely fall in price to match the levels at which the secondary shares are offered. A sudden 20% drop can be a nasty surprise for shareholders. But – the stock of a company involved in a secondary offering tends to recover quickly after the offering is complete. So if you’re looking for a good entry point, the announcement of a secondary offering is often a good spot to get in.
The other issue is dilution. A secondary offering means that more shares hit the market. As an example, if there are 20% more shares on the market, then earnings per share will fall by 20%. Dilution is usually not an impactful thing for an up-and-coming company that looks to be on the verge of a nice surge in revenue, but still, you should be aware of the potential.
To wrap up, I rate Ondas Systems an attractive speculative “buy” under $4, even with the potential that a secondary offering could hit the share price by as much as 20%.
Until next time,
The Profit Sector