Why Did Red Cat Stock Pop, Then Drop?

Red Cat Holdings (NASDAQ: RCAT) stock jumped nearly 5% this morning before turning tail and tumbling to a 1.1% loss as of 12:20 p.m. ET Tuesday on news from the FCC:

This morning, says Red Cat, the Federal Communications Commission announced it will "immediately implement Section 1709 of the FY25 National Defense Authorization Act (NDAA)."

Image source: Getty Images.

What the heck is "Section 1709 of the FY25 National Defense Authorization Act?"

Red Cat explains that the section in question "adds foreign-manufactured drones and their critical components to the Covered List effective immediately" to address "unacceptable risks" to national security.

Also commenting on the move today is investment bank Needham, which explains: "All new covered foreign UAS and components [are banned from receiving] FCC approvals and ... ineligible for lawful operation in the U.S. market."

So basically what I'm hearing is that the FCC just banned foreign-made drones, and even foreign-made drone parts from use in the U.S. And the reason this is good news for drone manufacturer Red Cat is that it removes competition from foreign suppliers -- making it easier for Red Cat to price its drones above market price, and thereby earn more profit.

Is Red Cat stock a buy?

The bad news for investors: Red Cat really needs the help.

Still stuck in start-up mode, Red Cat sold less than $8 million worth of drones over the past year -- not a lot for a company with a $1.1 billion market capitalization. (It actually works out to a price-to-sales ratio of nearly 150 times!)

It almost goes without saying that Red Cat is deeply unprofitable, losing $90 million over the past year, and burning cash to boot -- $70 million. With or without help from the FCC, Red Cat stock looks like a sell to me.

Rich Smith 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.