Yesterday, while running along the docks of Baltimore’s harbor, I heard a familiar hum.
It didn’t belong to a bug or a bird or any sort of living creature, and it wasn’t being made by any of the AC units lining the newly built waterfront condos of Fells Point.
No, this hum was from something a bit less natural and far more futuristic. It’s a sound I’ve heard several times before, but only at industry conferences and private tech conventions. Hearing it out in public was a first for me, but it certainly won’t be the last time that happens.
In just a few more years, you’ll begin to hear this humming too. In fact, you’re going to start hearing it all the time. It’ll probably be annoying at first, but you’ll eventually get used to it. Even New York City traffic becomes white noise after a while.
Today, though, this humming should be nothing other than music to your ears. That’s because for anyone positioned properly in the tech market, that humming is the sound of money.
It’s a Bird! It’s a Plane!
Once you see it, you know exactly what it is… Granted, you might find yourself a bit torn on exactly on what to call it.
Those in the field prefer to use the terms unmanned aerial vehicle (UAV) or unmanned aircraft system (UAS), while most of us just stick with the word “drone” for the sake of brevity.
Ultimately, the semantics don’t really matter. What we decide to call them won’t make a difference — they’re coming no matter what, and they’re bringing a massive investment opportunity along the way.
Most people have yet to hear the aforementioned hum, not because drones aren’t useful or practical machines (they most certainly are) but because current Federal Aviation Administration (FAA) regulations have quite literally kept this industry on the ground.
This sort of thing happens all too often in our world of big government and red tape, but regulations can only halt progress for so long. Despite the FAA’s efforts to keep commercial drones out of national airspace, growing pressures from both Congress and the tech industry will soon force the administration to open up the skies.
Resistance is Futile
As part of a complete overhaul of the FAA, Congress passed the FAA Modernization and Reform Act in 2012.
In addition to allocating the entirety of FAA funding, the bill mandates that the administration open the National Airspace System (NAS) to commercial drone flights by the end of September 2015. This means drones will soon be allowed to fly in the same federal airspace as commercial airliners.
At the same time, the world’s biggest tech companies are betting big on commercial drone use. Facebook (NASDAQ: FB) dropped $20 million on UK-based aerospace company Ascenta in March, and Google (NASDAQ: GOOG) purchased drone-maker Titan Aerospace for $60 million in April.
When Amazon announced its intentions of building a drone delivery system called Prime Air in December 2013, most people laughed at the idea, thinking it was nothing but a media stunt.
Seven months down the road, however, it’s clear the company was dead serious.
In his annual letter to shareholders a few months following the initial Prime Air announcement, Amazon CEO Jeff Bezos stated:
“The Prime Air team is already flight testing our 5th and 6th generation aerial vehicles, and we are in the design phase on generations 7 and 8.”
Then, on July 9th, Amazon (NASDAQ: AMZN) submitted a petition of exemption to FAA administrator Michael Huerta in order to conduct product testing. Language in the document details Amazon’s progress:
“We are rapidly experimenting and iterating on Prime Air inside our next generation research and development lab in Seattle. In the past five months, we have made advancements toward the development of highly‐automated aerial vehicles for Prime Air, including:
- Testing a range of capabilities for our eighth‐ and ninth‐generation aerial vehicles, including agility, flight duration, redundancy, and sense‐and‐avoid sensors and algorithms;
- Developing aerial vehicles that travel over 50 miles per hour, and will carry 5‐pound payloads, which cover 86% of products sold on Amazon;
- Attracting a growing team of world‐renowned roboticists, scientists, aeronautical engineers, remote sensing experts, and a former NASA astronaut.”
Amazon’s VP Paul Misener goes on to proclaim:
“One day, seeing Amazon Prime Air will be as normal as seeing mail trucks on the road today, resulting in enormous benefits for consumers across the nation.”
If all goes as planned, Misener would certainly be right. Amazon’s promise of thirty-minute package delivery would be incredibly convenient to consumers, not to mention highly disruptive to standard delivery firms and brick-and-mortar retail.
A Second Stroll Around the Block
Those who remain skeptical about Prime Air and commercial drones in general seem to forget what happened with robotics company Kiva Systems in 2012.
At the time, Amazon’s $775 million buyout of Kiva seemed a bit audacious to some investors, but just two years later, it’s apparent how important Kiva’s automated warehousing has become.
Kiva’s robots have reportedly increased worker efficiency by as much as 400%, and in Amazon’s annual shareholder meeting, Jeff Bezos announced that the company now expects to have 10,000 units deployed throughout its factories by year end.
Amazon’s warehouse scale is up to 1 million square feet, and most of that space is crawling with Kiva’s drones.
These facilities are so cutting-edge that when Amazon first opened its warehouses to public touring, 14,000 people signed up almost immediately, buying up slots through 2015.
When it comes to robotics and automation, Amazon isn’t an amateur — it’s a world leader.
Bezos and company understand the value of robots both in and outside the factory. Amazon has the experience and the infrastructure to make this happen — it’s just a matter of waiting at this point.
Incessant Humming
With the NAS opening up to commercial drones as soon as next year, and with heavy investments coming from major tech companies like Google, Facebook, and Amazon, analysts are expecting a massive rush of economic opportunity over the next decade.
The Association for Unmanned Vehicle Systems International (AUVSI), for example, estimates that drones will add 100,000 new jobs and $82 billion in additional economic activity between 2015 and 2025. It expects much of this growth to come from robotic agriculture:
“Unmanned aerial systems (UAS) in agriculture have the potential to be a $3 billion market in just the first three years after the FAA opens the commercial airspace. Over the next decade, this number will rise to almost $30 billion.”
Teal Group offers similar projections for the drone market as a whole, predicting $89 billion in sales in the next 10 years in its World Unmanned Aerial Vehicle Systems, Market Profile and Forecast for 2013.
The FAA predicts as many as 30,000 drones will hit American skies as soon as 2020, meaning the hum I heard along the docks of Baltimore yesterday will soon be commonplace. These drones will come from a wide variety of manufacturers, many of which have yet to hit the public markets.
Plenty of investors are placing bets on long-time UAV company AeroVironment (NASDAQ: AVAV) right now, driving shares up to staggering levels. The stock is up 72% since our own recommendation in June 2013, but with a P/E ratio now at 154, investors should err on the side of caution.
The best bets on robotics right now aren’t in UAV companies (there aren’t many to choose from in the first place), but instead in both ground-based robotics and critical components like computer chips.
Following this kind of investment strategy can allow you to play the growing trend of automation while avoiding the inevitable bubbles that come with well-recognized firms.
With Amazon trading at $358 a share with a mind-boggling P/E of 561, it’s far more profitable to invest in companies providing, say, the proximity sensors that ensure these kinds of drones don’t crash.
Until next time,
Jason Stutman
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