Embodied AI And Autonomy Will Transform Defense And Industrial Automation Over The Long Term

Catalysts

About Palladyne AI

Palladyne AI develops embodied AI and autonomy software integrated with aerospace engineering and U.S. manufacturing to power defense and industrial automation systems.

What are the underlying business or industry changes driving this perspective?

• The shift in defense priorities toward cost per effect and attritable autonomous systems directly favors Palladyne Defense offerings like Banshee and SwarmStrike. This positions the company to capture larger program awards and may support revenue expansion and operating leverage.
• Growing emphasis on reshoring and sovereign U.S. defense production aligns with Crucis' certified American manufacturing footprint and 100,000 square feet of capacity. This supports the potential for higher volumes, improved factory utilization and structurally stronger gross margins.
• The acceleration of AI moving from data centers into real mission hardware and edge autonomy is creating broader demand for SwarmOS, BRAIN and IntelliSwarm, which can scale across multiple platforms and customers and may increase software and avionics revenue per program.
• The vertically integrated stack of AI software, aerospace design and in-house manufacturing can shorten development cycles from concept to production. This may enable Palladyne to pursue more contracts under rapid fielding initiatives and to convert backlog into revenue more quickly.
• The dual-engine model of Palladyne Defense and Palladyne Commercial, both leveraging a shared autonomy core, allows innovation in one market to support developments in the other. This may support growth in recurring software revenue and improve blended net margins as the mix shifts toward higher value-added intelligence layers.

Assumptions

This narrative explores a more optimistic perspective on Palladyne AI compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Palladyne AI's revenue will grow by 154.0% annually over the next 3 years.
• The bullish analysts are not forecasting that Palladyne AI will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Palladyne AI's profit margin will increase from -953.5% to the average US Machinery industry of 9.4% in 3 years.
• If Palladyne AI's profit margin were to converge on the industry average, you could expect earnings to reach $6.7 million (and earnings per share of $0.13) by about December 2028, up from $-41.4 million today.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 108.2x on those 2028 earnings, up from -4.8x today. This future PE is greater than the current PE for the US Machinery industry at 25.3x.
• The bullish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.39%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Palladyne AI is repositioning itself as a vertically integrated mid tier defense prime in a nascent embodied AI category, but the long Department of War procurement and validation cycles for new autonomous weapons platforms like Banshee and SwarmStrike mean that large scale production contracts could take years or never materialize. This would constrain revenue growth and delay operating leverage in both defense hardware and software.
• The strategy depends on rapidly advancing complex systems from technology readiness level 6 to technology readiness level 9 with only about $5 million of planned incremental investment and on GuideTech's ability to repeatedly compress design cycles. Any technical setbacks, test failures or certification issues in mission critical avionics and munitions could force rework and schedule slips, driving cost overruns that depress gross margins and push out earnings inflection.
• Management is layering multiple new business models onto the company at once, including defense systems integration, avionics components, contract manufacturing and industrial software as a service. If execution resources are spread too thin or if integration of GuideTech and Crucis is slower or more expensive than planned, the company may fail to scale either defense or commercial pipelines effectively, limiting revenue synergies and keeping net margins deeply negative for longer than bullish expectations assume.
• The bullish thesis assumes strong alignment with long term U.S. defense industrial policy around reshoring and autonomous systems. Secular budget shifts, policy reversals, program cancellations or a slower than expected rollout of initiatives like Replicator and mass attritable munitions could reduce the addressable demand for Palladyne's specific platforms and manufacturing capacity, compressing backlog growth and undermining visibility into future earnings.
• The acquisitions add approximately $31 million of consideration plus a potential $25 million earn out tied to GuideTech revenue targets and introduce exposure to large defense primes as key customers. If those primes insource capabilities, delay programs or exert pricing pressure, or if GuideTech fails to reach the $71 million revenue hurdle, the company could face structurally lower pricing power and return on invested capital, resulting in weaker long term free cash flow and earnings than the narrative implies.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Palladyne AI is $11.0, which represents up to two standard deviations above the consensus price target of $9.0. This valuation is based on what can be assumed as the expectations of Palladyne AI's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $11.0, and the most bearish reporting a price target of just $7.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $71.2 million, earnings will come to $6.7 million, and it would be trading on a PE ratio of 108.2x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $4.42, the analyst price target of $11.0 is 59.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.