Red Cat's 'Flying Blind' Expectations: A Short Seller's Perspective

Red Cat Holdings Inc. (NASDAQ: RCAT) has been the subject of a scathing report by short seller Kerrisdale Capital, which claims that the drone maker's management has set "almost impossible" expectations for investors. In a report titled "Flying Blind," Kerrisdale argues that Red Cat's recent run in shares, which has seen the stock gain over 1,200% in the past year, is built on hype rather than reality.

Kerrisdale Capital announced a short position against Red Cat on Thursday morning, citing several reasons for its bearish stance. The short seller believes that Red Cat has reached its peak, at least in the near term, and that expectations for both the size of the U.S. Army's short-range reconnaissance (SRR) contract and the potential for follow-on sales bear almost no relationship to reality.



The short seller pointed out that Red Cat's recent share price surge has been driven by anticipation of a production award for the U.S. Army's short-range reconnaissance (SRR) drone. However, Kerrisdale argues that the Army's detailed funding request for 2025 shows that it only expects to spend between $20 and $25 million on drone systems this year, which is significantly lower than the $80 million in revenue that Red Cat's management has implied for 2025.

Moreover, Kerrisdale believes that Red Cat's claims of a vast follow-on market, including other U.S. military services, government agencies, and U.S.-allied militaries, are overstated. The short seller noted that the Air Force, Marines, and Coast Guard either have little need for an infantry drone or have existing drone programs. Additionally, Customs and Border Patrol's near-term drone procurement budget is reportedly only $1 million, which is a small market for Red Cat's drones.

Kerrisdale also questioned Red Cat's ability to fulfill its production promises, given the company's historical best-seller production rate and the ambitious 2025 guidance that assumes the production of three new drone models at a rate three times faster than the company's historical best-seller.

The short seller's report comes as Red Cat faces internal challenges, with two key executives, including George Matus, resigning and selling large blocks of shares upon departure. These developments have raised concerns about the company's ability to meet its ambitious projections and maintain its market valuation.

In response to the short seller's report, Red Cat announced that it was preparing a statement on the matter. The company's stock was down 1.88% at $10.71 at the time of publication on Thursday, according to Benzinga Pro.

As an investor, it's essential to stay informed about the companies you invest in and be aware of potential risks and challenges they may face. While Red Cat's recent performance has been impressive, the short seller's report highlights several concerns that investors should consider when evaluating the company's prospects.