Is Red Cat Holdings a Top Drone Defense Stock to Buy Right Now?

Last year, the Pentagon announced a $1.1 billion program to unleash American drone dominance. This program builds on the lessons learned from Ukraine's ongoing conflict with Russia, as the rules of warfare continue to evolve with modern technology.

Related to this change, one company that has come onto investors' radars is Red Cat Holdings (NASDAQ: RCAT). The company has positioned itself as a U.S.-based drone company and is competing for major defense contracts. Is this enough to make the drone stock a buy right now? Let's dive in and explore its long-term potential.

Image source: Getty Images.

The Pentagon's Drone Dominance Program put Red Cat on the map

Red Cat stock has been volatile thus far, rising as high as $18 per share amid growing U.S. military support for drones, only to fall 48% in recent weeks. The company has ridden the wave of interest for drone companies, and Red Cat has pivoted into a pure-play, defense-oriented hardware and software provider through its subsidiaries Teal Drones, FlightWave Aerospace, and Blue Ops.

The stock's rise is attributed to the Pentagon's aggressive investments in drone technology as modern warfare evolves. As part of this, the Department of Defense launched a $1.1 billion Drone Dominance Program to field 200,000 low-cost, domestically produced uncrewed aerial systems by 2027.

The program aims to build up the United States' domestic drone-making capabilities, focusing on driving drone costs down to around $2,000 per system in the long run. The National Defense Authorization Act (NDAA) prohibits the Department of Defense from purchasing Chinese-made drones or drones containing critical Chinese components, due to concerns about reliance on a foreign country's supply chain and potential data leakage.

In the Drone Dominance Program, Red Cat has emerged as a formidable competitor. As part of the program, drone manufacturers are undergoing a series of "gauntlets," or high-end competitions to test drones in real-world applications. Red Cat's subsidiary, Teal Drones, advanced to become one of 12 finalists competing for a share of an initial $150 million allocation to supply 30,000 low-cost strike units.

Beyond this, Red Cat is seeing strong international demand for its drones from allies, including NATO and the Japanese Ministry of Defense. In the first quarter, Red Cat generated a record $15.5 million, an 849% year-over-year increase, thanks to deliveries of its Black Widow and Edge 130 platforms.

Red Cat's growth has come at a cost to its investors

Red Cat is enjoying tailwinds from demand for domestic drone manufacturers, and is working to scale up. However, this has come at the expense of existing shareholders, as the company issues stock to fund acquisitions and expanded operations.

Since the start of 2025, the company's shares outstanding have grown from 85.6 million to 121.8 million by the end of the first quarter. The company announced another $225 million public equity offering in May, selling 23.9 million shares at a $9.40 per share. For investors, the equity offering highlights the risks of investing in early-stage start-ups, as these companies incur substantial expenses to grow.

Red Cat is carving out a niche as a pure-play stock in the combat drone sector, offering long-term upside potential. However, the company is still scaling up and burning cash, and I'd like to see its high-profile military contract awards translate into recurring orders and improved margins before seriously considering investing in this drone stock.

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.