Red Cat Holdings vs. Unusual Machines: Which Drone Stock Is a Better Buy Today?

Drones are becoming increasingly important for national security and defense. In Ukraine's conflict with Russia, low-cost drones have proven useful for both offensive and defensive attacks. The U.S. is taking notes and making a massive push to boost its domestic drone manufacturing ability, as highlighted by the Pentagon's $1.1 billion Drone Dominance Program.

This push could provide a strong tailwind for Red Cat Holdings (NASDAQ: RCAT) and Unusual Machines (NYSEMKT: UMAC), which play key roles in U.S. domestic drone production. With defense budgets slated to grow, these two companies stand to benefit. But which drone stock is a better buy right now? Let's dive into the different business models and growth prospects to find out.

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Domestic drone production has become a national security priority

U.S. regulators are making a strong push to diversify supply chains for crucial materials and other products central to national security away from China. As part of last year's National Defense Authorization Act (NDAA), U.S. defense contractors cannot use Chinese sources for drones or related components, creating an opportunity for U.S.-based companies like Red Cat and Unusual Machines.

While the two companies operate in the drone industry, there are some important differences to consider. Red Cat manufactures tactical, unmanned aircraft systems (UAS) equipped with artificial intelligence (AI) for government and commercial customers, and its flagship products include the Teal 2 and Black Widow, both of which are reconnaissance battlefield drones. The company also manufactures the FANG, an NDAA-compliant first-person view (FPV) drone used for military and tactical strike operations.

Unusual Machines doesn't manufacture drones itself. Instead, the company supplies components to Red Cat and other drone manufacturers. As an original equipment manufacturer, Unusual Machines builds the underlying hardware for drones, including things like FPV goggles, motors, and electronic speed controllers.

Red Cat and Unusual Machines have some history. In 2024, Red Cat divested from some of its consumer-focused businesses, which were sold and eventually formed Unusual Machines. The move enabled Red Cat to focus solely on defense and military drone technology, while Unusual Machines has grown into a supplier of these key components. Last year, Unusual Machines agreed to design and manufacture customer drone motors and components for Red Cat.

Which drone stock is right for you?

Red Cat is a direct supplier of military hardware to the Pentagon. Earlier this year, the company's subsidiary, Teal Drones, was among 25 vendors invited to participate in the Pentagon's competitive field trials in Georgia as part of its $1.1 billion drone program.

The company emerged as one of 12 finalists from these field trials, positioning itself to receive a share of the $150 million allocated by the U.S. for its initial 30,000 low-cost attack drone units. Looking ahead, there will be three additional gauntlets, with the number of suppliers ultimately whittled down to five by early 2027.

Unusual Machines, on the other hand, is a pick-and-shovel play for the drone industry. While it doesn't manufacture its own drones, it provides the necessary components for drone manufacturers. In addition to Red Cat, the company also works with Dynamic Aerospace Systems and Performance Drone Works, giving it exposure to the broader expansion of the drone industry.

RCAT Revenue (TTM) data by YCharts

Buying Red Cat today is an investment in the company and a belief that it can win large government contracts, while buying Unusual Machines could offer greater upside and is more of a bet on the broader expansion of the drone industry. Both stocks carry risk, as both businesses are currently cash-burning operations and analysts project they will continue to post net losses through 2028.

Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.