Why Red Cat Stock Crashed Today
Key Points
Red Cat rival Kratos Defense is selling shares after a big stock price run-up, to raise up to $1.4 billion in cash.
Red Cat may be tempted to follow suit as it continues to burn cash.
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Red Cat Holdings (NASDAQ: RCAT) stock tumbled 11.2% through 1 p.m. ET Friday on no obvious bad news -- no obvious news for Red Cat itself, that is to say.
There was some news for investors in Red Cat rival Kratos Defense & Security (NASDAQ: KTOS).
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Kratos needs cash
This morning, Kratos announced plans to expand the size of its secondary stock offering, which was first announced last night. In exchange for selling up to 16.4 million shares of new stock, Kratos plans to raise up to $1.4 billion in new cash.
What does that have to do with Red Cat? There are a couple of implications, neither of which may please Red Cat shareholders.
What this means for Red Cat
First and foremost, one of Red Cat's toughest rivals is about to be swimming in cash, which it can deploy to outspend and out-research its drone rivals, and capture share in the military drones market. Red Cat may struggle to compete with that.
The second implication is that Red Cat may be inspired to do what Kratos just did.
Like Kratos, Red Cat is burning cash at a furious pace -- $70 million in annual cash burn, with no end in sight. Like Kratos, Red Cat stock has enjoyed enormous success over the past year as investors swarmed to buy drone stocks. Shares of Red Cat are up more than double over the last 52 weeks.
At a sky-high valuation of 49 times trailing sales, Red Cat management may be tempted to cash in on its success, sell shares, raise funds, and dilute shareholders substantially -- just as Kratos did.
Seeing as Kratos stock dropped 7% after announcing its stock offering, that might not be great news for Red Cat shareholders.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kratos Defense & Security Solutions. The Motley Fool has a disclosure policy.
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