In this episode, Mark and Shani unpack the DroneShield (ASX: DRO) story - not to predict where the share price goes next, but to extract the critical lessons every investor needs to understand about valuation, management incentives, emerging technology, and hype-driven markets.

With drones playing a visible role in modern warfare, the narrative was compelling. But the valuation, insider selling, financial red flags and competitive risks tell a more complicated story.

Want more on Droneshield? James points to Droneshield in his article ‘The sectors set to soar on government spending’.

You can find the transcript for the episode below:

Shani Jayamanne: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances or needs.

Mark LaMonica: So I was talking to our colleague, Sim yesterday, Shani, and she is considering buying a drone.

Jayamanne: Really?

LaMonica: Yes, she went to whatever that electronic store is.

Jayamanne: JB Hi-Fi?

LaMonica: That one, to look at a coffee maker or something. And then she ended up in the drone section where one of the salespeople was trying to sell her a drone and now she seems very into it.

Jayamanne: And why are we talking about that today, Mark?

LaMonica: We’re talking about that for a very specific reason because we’re going to talk about DroneShield. In case we were upset at her drone, we could use DroneShield’s product to knock it out of the sky. And the other reason we’re talking about DroneShield is it’s been one of the hottest shares on the ASX in 2025 and then very recently, very much the opposite. So on December 31st, 2024, DroneShield closed at a price of $0.77. On October 9th, it was trading at $6.68 and that is a 767% increase.

Jayamanne: And things have not gone well since October 9th. The shares were trading at $1.72 on November 21st. That’s a drop of about 75% in a little more than a month and a half.

LaMonica: So that’s quite a roller coaster ride. And we thought telling the story of DroneShield would be one, interesting. And then two, it would also offer some important lessons for investors.

Jayamanne: And we do want to say a couple of things up front. Neither of us own DroneShield’s and Morningstar does not cover the company.

LaMonica: And a little bit of background on DroneShield that I was alluding to in the little story about knocking Sims drone out of the air. DroneShield creates anti-drone devices. And if you look one up, I’m maybe the only one that finds this amusing. It looks like some sort of giant alien gun that came from like a 1980s sci-fi movie. Have you ever seen a picture of this? Okay, I’ll show you one afterwards. It is, it’s very amusing.

Jayamanne: All right. Well, Mark’s critique aside, it is basically the idea is to jam the communications to the drone which disables them. And they also offer various other drone detection systems. And in the war between Ukraine and Russia, drones are used extensively by both sides. So there is a lot of awareness about drone capabilities and many militaries and police forces around the world are interested in anti-drone technology.

LaMonica: And what Shani just went through is a pretty compelling narrative. And of course, investors are attracted to compelling narratives, which explains that 767% gain between the beginning of the year and October. But we also want to explore what happened since then.

Jayamanne: Yeah. So the board and the CEO of DroneShield had incentives in their contract that if they hit a certain sales goal, they would be awarded shares in the company. And they were awarded $70 million worth of shares.

LaMonica: Which is nice.

Jayamanne: Yeah.

LaMonica: Nobody wants to give me $70 million worth of shares. Or anything else. But what did they do when they got this $70 million worth of shares? They immediately sold them. And not just a portion, all of them. Each board member and the CEO sold every single share and have really said very little publicly, except to say that the sales were approved. And of course, they were approved by the board. So the people that sold the shares also approved the sale of the shares. And according to the AFR, CEO, Oleg Vornik has privately told some investors he sold the shares because of the personal risk he was taking because the company was selling anti-drone equipment to Ukraine. And I guess Russia might want to knock him off. And he’s actually Russian, which is also interesting.

Jayamanne: Well, there you go. Well, investors are obviously a little spooked. And during the same period in November, they were selling the shares and announcement went out for a new contract with the Pentagon, which later had to be withdrawn because it was an error. Then the head of the US part of the business quit.

LaMonica: So lots of stuff happening. And all this is coming against the backdrop of questions about the effectiveness of these giant space guns that they’re selling people to try to knock out these drones. So Russia and Ukraine have, of course, been trying to jam each other’s drones and have come up with a way to prevent that. And that is they attach the drones to very long fiber optic cables. So of course, there’s nothing to jam.

Jayamanne: So again, investors are a little spooked. And we said at the beginning of the podcast, DroneShield is not covered by Morningstar. And it isn’t a share that aligns with either of our investment strategies. But that doesn’t mean that there aren’t lessons for investors.

LaMonica: And the first lesson is how critical management is to the success of a company. So obviously you want skilled management, you want ethical management, and you want the interests of management to be aligned with the interests of shareholders. And often this happens by paying compensation in shares or options. That way, as shareholders, managers are incentivized to do things that will help the share price over the long term.

Jayamanne: And this is obviously why the market reacted so negatively to the news that the CEO and board sold all of their shares as soon as they could. It is fairly unusual to have a startup type company which DroneShield still is to have no ownership by management. Part of this is the unusual history of DroneShield. The company was started just over 10 years ago by two former US military members and then purchased by a private equity firm who wanted to list the company in Australia.

LaMonica: And that is where the current CEO, Oleg Vornik, came in. He was an investment banker in Sydney, so the board chose him because he understood how to take companies public in Australia. So at this point, the founders are gone. And I think there are some legitimate questions about his commitment to the company over the long term given the share sale.

Jayamanne: And this wasn’t the first time Vornik sold shares. In February 2024, he sold $7.2 million worth of shares. The two other board members sold $3.4 million of shares. Investors shrugged off that sale, but not this one.

LaMonica: So maybe one reason I don’t want to speculate. Obviously there’s this personal danger thing, but I don’t want to speculate on why Vornik sold the shares. But perhaps he looked at the valuation and thought that it was warranted and wanted to sell before there was an inevitable sell-off. So before the shares dropped, DroneShield was worth a remarkable $5.6 billion. And that is for a company that is expected to have revenue of $210 million in 2025 with profits of $5.2 million.

Jayamanne: And that is a price to earnings ratio of over 1,000 and a price to sales of around 28 times. So that is shockingly high. And further indications that maybe he thought the share price was overvalued was an interview that Vornik gave to Bloomberg where he described the company as a meme stock and that he was bothered by how quickly the share price had increased and that it had been driven by retail investors.

LaMonica: And it is important that everyone makes their own judgment call if this is the type of management you want running a company that you’re investing in. And it is fairly hard to, of course, assess anybody that you haven’t met. And all you can really go off of is their actions. And these actions, at least to me, don’t indicate that Vornik is interested in aligning his incentives with those of the shareholders. And it also doesn’t really seem like he respects a lot of the shareholders because describing your company as a meme share doesn’t really put any of those shareholders in a good light.

Jayamanne: No. So the next lesson is the challenge of buying a share in an emerging technology. Drones have been around for a little while now, but the war between Russia and Ukraine is the first time small, relatively cheap drones have been used in this manner. And in warfare, there is a lot of incentive to respond to effective tactics. And then there is a lot of incentive to change those tactics once the enemy has figured out a way to stop them. But this is quickly evolving environment and it does occur with any new technology and can be extremely hard for investors to navigate.

LaMonica: Exactly.So the reward is bigger, but also the risk of picking a loser is also huge. So unless you have some sort of specialized knowledge about drones and anti-drone technology, it can be really hard to assess what is most critical and that is the long-term effectiveness of DroneShield’s products to disabled drones, especially considering that many of DroneShield’s, numerous competitors have more to spend on research and development. And just this constant need to invest in research and development isn’t great if you’re a shareholder, because of course that’s money that isn’t available for other purposes like growing the business and rewarding shareholders.

Jayamanne: And I think this is where you need to be really careful as an investor and that you are operating within your circle of competence and where the types of investments that you are buying are aligned with your investment strategy. In this case, the narrative is obviously really compelling, but break it down a little bit and figure out what needs to happen for this to be a positive investment outcome for you.

LaMonica: And this gets into the next lesson and that is valuation. So to say DroneShield was and I think frankly still is, price to perfection is a big understatement. As we always say in this podcast, share prices reflect the collective expectations of investors and when those expectations get too high, they can become impossible to meet.

Jayamanne: And I think one thing to consider is simply lining up the pros and cons of an investment against the valuation level. Because the cheaper a share is trading, the more it might make sense to overlook some red flags. But when things are priced to perfection, it becomes a little bit harder than that.

LaMonica: And we mentioned some of those red flags obviously earlier, the share sales by insider, changes in tactics that may impact the effectiveness of DroneShield’s technology. But there have also been questions raised about some troubling trends in the financial statement. So, Shani, since your mother tells everyone that you’re an accountant, maybe you should talk about what’s going on in the financial statements.

Jayamanne: All right, so I’ll quote the AFR here. DroneShield’s inventory was rising and there was a growing mismatch between revenues booked and sales shipped. A big buildup in raw materials raised the eyebrows of accounting sleuths who speculated it could be used to inflate gross profit margins. The AFR also stated, another major concern was that a growing share of DroneShield sales were via so-called indirect channels such as middlemen or distributors. Since 2023, the share of sales to intermediaries increased from 10% to over 80%, raising worries about where the gear was landing.

LaMonica: Does your mother describe you as an accounting sleuth or just an accountant?

Jayamanne: Just an accountant, I think.

LaMonica: Okay, well, there’s always, hope that you can grow into your role a little bit. We have a final lesson and this is one that is applicable to any investor and something that you should think about for any share that you own. This certainly applies to anyone still holding DroneShield shares or somebody’s considering buying this dip. Make sure that you have an investment strategy that outlines what criteria you have for buying shares and how those shares align with your goals. Make sure you have a thesis for each share you own that outlines why and how a good investment outcome will come from this decision that you’ve made.

Jayamanne: What would your thesis be for DroneShield?

LaMonica: The obvious thing is that this is a play on earnings growth. Even though the shares have dropped a good deal, it is hard to see how shareholders are going to profit from increasing valuation levels because they’re still really high. There just is no possibility they’re going to go up over the long term. The company doesn’t pay a dividend and so those are two of the three drivers of shareholder returns. So, the last one is earnings growth. I don’t have my own thesis for DroneShield. I would say you need a reason why you think DroneShield’s technology will be the one adopted by militaries and police forces around the world because I think it’s obvious that demand for anti-drone technology will be there but there are lots of competitors and I think the thesis needs to surround the idea that DroneShield will win and how over time in this emerging technology they can build a moat that will hold competitors at bay.

Jayamanne: The good thing about identifying a thesis is that you will have to do some research into anti-drone technology and really understand the competitive positioning of DroneShield. If you ultimately decide you believe in the company it will give you more confidence in your own decision which is important considering how volatile the share price is.

LaMonica: And we always do talk about how investors make more poor decisions when there is a lot of volatility so having confidence in your plan is the best way to combat the FOMO and fear that comes when share prices are whipping around. So something many DroneShield shareholders are no doubt experiencing in 2025. So thank you guys very much for listening to us drone on about DroneShield we really appreciate it.

Invest Your Way

A message from Mark and Shani

For the past five years, we’ve released a weekly podcast and written on morningstar.com.au to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis, backed by the work of hundreds of researchers and professionals at Morningstar.

We’ve shared our journeys with you, and you’ve shared back. We’ve listened to what you’re after and created a companion for your investing journey – Invest Your Way. Invest Your Way is a book that focuses on the investor, instead of the investments. It is a guide to successful investing, with actionable insights and practical applications.

If anyone would like to support this project you can buy the book now. Thanks in advance!

Purchase from Amazon

Purchase from Booktopia