Opening Thoughts
First, none of this is investment advice. My investment research is a hobby, and I’m not a professional. Do your own research and form your own views.
Second, I intend to publish these posts in unpolished form. This is because my tendency is towards doing more analysis than less, and this takes time. It also increases the risk that I don’t post with the frequency I want. I’d rather publish sooner and risk some mistakes, and get the benefit of readers’ eyes on them.
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The NXSN Thesis
I’m spending a lot of time thinking about the risks to the NXSN thesis:
1. The drone market is and will continue to grow robustly for many years
2. NXSN’s products, ongoing R&D, and increasing customer presence positions it to earn its fair share of this growth
3. NXSN’s margins are defensible
4. NXSN is undervalued relative to its growth profile
I’m actively looking for views that undermine the core thesis. Right now my biggest concern is that some of these points above are not knowable to a threshold that approaches certainty. And without both a) compelling supportive evidence, and b) a compelling lack of dissenting evidence, it seems hard to really size up NXSN. I’m mindful that absence of proof is not proof of absence.
Arguments 1 & 2: the drone market will grow, and NXSN will earn its fair share
It’s hard to find credible arguments that the military (and commercial) drone markets will not grow for at least another decade. In case helpful, here is one example of the dozens of industry reports that I’ve seen on the topic. After reading ~20, I can say that there’s a strong consensus here.
At the same time, it’s equally hard for me to form a credible perspective on what specifically entitles NXSN to its share of this growth.
In general, companies maintain their competitive position until a (severe) change in market structure or competition forces a change. What could this be for NXSN? It seems like we are in the beginning of a massive and global mix shift in defense spending towards UAVs. This involves not-fast coordinated efforts like mobilizing global supply chains and manufacturing bases. This sort of global mobilization is typically done if and only if there’s consensus in continued demand. So, I’m not too worried that end-market growth falters materially, especially in the next few years. At a minimum, with Trump in office, the world is highly unlikely to be glowing in so much confident stability that there is a coordinated trend towards disarmament.
I think ultimately this sort of disruption would come from two sources: 1) technical obsolescence, and 2) modularity reducing switching costs.
Technical obsolescence
I have no idea how to get comfort here for the long-term. It’s the nature of competitive and technical domains that they are constantly under assault with the force of global R&D. But if I had to guess on one path here, it would be something like this: NXSN technology is great for the moment, but the rate of improvement in general will be so fast as to create a rapid obsolescence cycle. The nature of this cycle is such that it either a) caters to large companies with massive R&D budgets, or b) massively reduces the barriers to developing compelling competitive tech. I’m taking the other side of this bet for a few reasons. First, I think [a] would be worse for NXSN, as it would require massive and speculative increases in R&D. [B] on the other hand creates more technical competition for NXSN, but doesn’t change the various distribution challenges inherent in selling to defense end markets: credible, established vendors have a strong edge. I the risk of [a] is lower than the risk of [b], but [b] doesn’t keep me up at night. In short, the world is full of examples of “good enough” technology winning dominant market share because it gets to critical scale faster than the next, potentially better, mousetrap.
Modularity reducing switching costs
NXSN touts that its systems are compatible with various customers’ platforms. This seems like table stakes to sell in this market. But every customer has experienced decades of vendor lock in (see the stories of $100k, 99% gross margin components for F22’s, etc.), and it seems like it would be negligent to not position new platforms to be able to compete vendors against one another. This certainly reduces the physical switching costs for a product. But are those the most important points of friction? Today, maybe. But over time, likely not. This is for two reasons.
First, in general markets tend towards standards. Even in pure commodity end markets it is uncommon for primary buyers (end users) to have a 50/50 or 33/33/33 wallet share vendor strategy. Rather, they tend to keep the top suppliers in pole position and periodically do market checks to ensure that realized pricing is competitive. This implies that vendors can i) get an early mover advantage by gaining wallet share in an fast-growing category, and ii) enjoy durability in this share by not messing up.
The second defense against modularity is more interesting and more speculative: a deep presence in physical technology can lay the groundwork for more stickiness in an intelligence / software layer over time. One fascinating analog is AXON in the late 2010s: the company went from a) having an early-mover advantage on energy weapons (with relatively low physical switching costs, but interesting buyer-habitual switching costs) to b) using those distribution channels to sell body cameras (arguably more commoditized vs. energy weapons), to c) building a software layer on top of the data provided by these cameras. This means that for customers to switch hardware vendors, they must overcome software switching friction. The Innovation Stack is a good read on this concept. But I also recommend looking back through AXON’s transition starting in roughly 2015.
Clearly NXSN’s is a different end market and it’s unclear that this analogy holds in pure form. But both customers and vendors are aware of these dynamics. It will be interesting to see how this progresses over time. Right now I view this as option value, and not required to find today’s valuation interesting. More on this below.
Arguments 3: NXSN’s margins are defensible
So long as NXSN can stay a bit (~1-2 years?) ahead of competitors in terms of product outcomes (low weight, high quality, market-hardened technology), and b) because their products are a low percentage of the fully-delivered cost of a drone, there is little incentive for customers to take performance risk from new vendors for relatively low savings.
All of this depends on how unique their products are over time, and how high the switching costs are (see prior points).
But in any case, I think this is likely a concern for the future (read: 2030+). I’ve led companies through massive growth curves, and the rule is that when the market is moving at pace, companies often defer optimization decisions (especially vendor optimization decisions) to later in order to focus on just keeping up today.
The market figures above show a ~8% growth rate 2025 vs. 2024. This compares to NXSN’s revenue growth rate (at guidance) of ~40%. So the naïve math shows NXSN is taking share overall. It’s rare that these trends suddenly stop.
The core concern I have on this dimension is that we have relatively low visibility into the leading indicators of NXSN’s growth. Its backlog entered the year at ~$80M, at 50% of guidance of $160M. The year before was a similar story. So we don’t have multiple years of backlog visibility. Similarly, they keep over 200 days of inventory, so it will be hard to tell signal from noise in inventory moves. In any case, if company growth breaks idiosyncratic to industry growth, we are unlikely to see it coming.
Argument 4: Valuation
NXSN’s valuation is up ~10% from my first post, but the table below is still relevant.