The exceptionally wild rise that DroneShield Ltd (ASX: DRO) shares have been on over the past few months continued this week in a spectacularly dramatic fashion.
On Tuesday, we covered Droneshield's jaw-dropping 31% crash, which stopped the company's incredible momentum that had been building up for months in its tracks. Before Tuesday's session, Droneshield had its fair share of down days in 2024. But it had still managed to gain a whopping 615% or so year to date.
But an article that questioned Droneshield's fundamentals was evidently enough for investors to turn on a dime against this company. Droneshield shares have been losing steam since Tuesday, dropping by 22% on that day, another 9.4% on Wednesday and finally 5.5% yesterday.
Today, investors seem to have finally turned a corner, with Droneshield shares currently enjoying a 6.65% rebound at the time of writing back up to $1.84 a share. But even so, Droneshield stock still remains down by more than 29% from where it was just three days ago.
With this extreme volatility in this ASX All Ords share on display for all to see, it might be a good time to go over Droneshield's financials and find out whether this company is still fundamentally expensive after its 30% haircut this week.
Are Droneshield shares still expensive after dropping by a third?
Normally, ASX shares report their earnings twice a year, and they may issue quarterly reports or trading updates in between to keep investors in the loop. It's during these periods of transparency that we really get a look at a company's fundamentals, allowing investors to reassess its valuation.
Droneshield is a little different. It still broadly adheres to this kind of schedule. However, the company has been regularly informing investors of major contract wins over the past few months too. This has arguably allowed Droneshield to maintain its upward momentum.
So let's go back to the company's last major financial update – the full-year earnings report we saw back in February.
Looking at this report, we can see why excitement has been building over Droneshield shares ever since. The company revealed that its revenues grew an astonishing 226% over the 2023 calendar year, rising from $16.9 million reported in 2022 to $55.1 million for 2023.
Software-as-a-service revenues grew even faster, rising from $331,000 to $1.393 million.
This all allowed Droneshield to grow from a net loss after tax of $900,000 in 2022 to a net profit of $9.3 million in 2023. That was Droneshield's first-ever profitable year.
An April quarterly update did nothing to dampen the hype surrounding Droneshiled. As we covered at the time, this quarterly update told investors that Droneshield's revenues over the three months to 31 March 2024 came in at $16.4 million, more than 10 times the $1.6 million the company brought in over the same quarter of 2023.
Droneshield also told the market that it has a $27 million contract backlog, as well as a sales pipeline worth over $519 million.
So you can see why this company has investors so excited.
Expensive or priced for growth?
But this excitement has undeniably left the Droneshield share price valuation looking stretched today. Sure, the company brought in $9.3 million in net profits in 2023. But today, Droneshield has a market capitalisation of $1.3 billion.
At the current Droneshield share price, we see the company trading on a price-to-earnings (P/E) ratio of 93.7, meaning investors are currently paying $93.70 for every $1 of Droneshield's earnings.
Droneshield currently also has a price-to-sales (P/S) ratio of 14.8, and a price-to-book (P/B) ratio of 17.7.
All of these metrics point to a company with a massively stretched valuation.
So yes, it's hard to conclude anything other than that Droneshield shares are fundamentally expensive right now.
However, these metrics are all based on the company's current financials. Investors are clearly valuing Droneshield on its future earnings potential. If the company can continue growing at its current pace over the next few years, which, given the current geopolitical environment, seems at least possible if not probable, then its shares start to appear much more affordable.
For instance, if Droneshield can indeed get to a place where it is handling $519 million in annual sales, its P/S ratio would drop from 14.8 to something closer to a 3 at the current market capitalisation.
Of course, whether that will happen or not is unclear right now. Investors still seem to be betting it will despite this week's dramatic sell-off. But only time will tell if the company will fulfil investors' lofty expectations.
