Coda Octopus Group: Weathering Margin Headwinds to Seize Defense Tech Dominance

Coda Octopus Group (CODA) has emerged as a pivotal player in underwater defense and marine technology, but its recent financial performance reveals a tension between near-term margin pressures and long-term strategic opportunities. Despite a 3.4-percentage-point decline in gross margins to 65.8% year-over-year in Q1 2025, driven by currency fluctuations and shifting revenue mix, the company is navigating these challenges with a focus on high-margin defense contracts and strategic diversification. For investors willing to look past short-term volatility, CODA's positioning in a rapidly growing defense tech sector—and its breakthrough products like the DAVD system—suggests a compelling long-term opportunity.

Margin Pressures: A Temporary Headwind

The company's recent margin decline stems from two key factors: currency impacts and a strategic shift in revenue composition. First, the weakening U.S. dollar against currencies like the British pound and Danish kroner has increased operating costs for CODA's international operations, particularly in Europe. Second, the mix of business segments has shifted significantly. The high-margin Products segment, which includes marine technology for offshore renewables, fell by 35.8% year-over-year due to geopolitical uncertainty in key markets. Meanwhile, the lower-margin Services segment surged by 76.6%, driven by demand for technical support and installation services tied to new defense contracts.

This segment shift, while diluting margins in the near term, reflects a deliberate strategic pivot. Management has prioritized growth in high-potential defense markets over traditional renewables, a move that aligns with the global shift toward defense spending. For instance, Germany's €400 billion defense investment plan and the EU's relaxed debt rules for defense spending create a tailwind for CODA's military tech.

The Defense Tech Opportunity: A Structural Tailwind

CODA's most promising growth lever is its DAVD (Diver Augmented Vision Display) system, which combines augmented reality, acoustic navigation, and real-time data to enhance underwater military operations. In Q1 2025, CODA secured an $800,000 order for 16 DAVD units from the U.S. Navy, targeting 75% of its active divers. The system's advanced features—such as a smaller form factor and higher-resolution display—have also attracted foreign navies, with a recent “resounding success” in a five-day trial.

The addressable market for DAVD is vast. Beyond the U.S. military's 4,000 active divers, CODA estimates a $500 million opportunity in public safety and law enforcement divers alone. Moreover, the system's modular design allows integration with platforms like the MK16 Underwater Breathing Apparatus, expanding its utility for special forces and EOD teams.

Note: This visualization would show CODA's revenue growth accelerating post-acquisition, with Q1 2025's 16.8% growth underscoring the Precision Acoustics acquisition's impact.

Why the Long-Term Outlook Remains Strong

1. Defense Spending Surge: Global defense budgets are rising, with Europe leading the charge. Germany's 10-year €400 billion defense plan and the EU's infrastructure fund allocations directly align with CODA's marine and acoustic technologies.
2. Product Momentum: Beyond DAVD, CODA's NanoGen portable sonar systems and advanced acoustic sensors are gaining traction in security and infrastructure inspection markets. R&D investments, up 11.8% year-over-year, ensure ongoing innovation.
3. Balance Sheet Resilience: With $24.5 million in cash and no debt, CODA is well-positioned to fund R&D, pursue acquisitions, and weather short-term headwinds.

Investment Thesis: Buy the Dip

The current margin pressures are transient. Currency impacts are cyclical, and the shift to higher-margin defense contracts will gradually offset the Services segment's drag. Meanwhile, CODA's addressable market in underwater defense tech—estimated at over $2 billion by 2030—is growing faster than its revenue trajectory.

Note: This visualization would highlight CODA's gross margin dip but contrast it with accelerating defense contract wins, signaling a margin recovery as defense sales scale.

Investors should focus on CODA's strategic execution: expanding DAVD adoption in U.S. and European militaries, leveraging its European manufacturing base to mitigate currency risks, and capitalizing on the Precision Acoustics acquisition's synergies. At current valuations—trading at 12x forward sales—a dip below $2.50 per share presents an attractive entry point.

Conclusion

Coda Octopus is at an inflection point. Its margin challenges are real but manageable, while its defense tech portfolio offers a rare combination of technological differentiation and secular growth. As global defense spending shifts toward advanced underwater systems, CODA's ability to capture share in this niche market positions it as a buy for investors with a 3–5 year horizon. The path to margin normalization may be bumpy, but the destination—dominance in a $2 billion opportunity—is worth the ride.

Final Note: Monitor CODA's Q3 results for DAVD order momentum and any updates on EUR/USD hedging strategies to gauge margin stabilization.