Three Ways to Invest in Drones

Just a few decades ago, the idea of airborne drones was something reserved for science fiction.

Today, though, flying drones have become commonplace for armed forces and even appear to be on the verge of becoming a popular commercial product throughout the world.

A handful of U.S. corporations have beta-tested the possibility of using drones to deliver goods — and, for the most part, the tests have been successful.

In a recent study, the Association for Unmanned Vehicle Systems International (AUVSI) estimated that drones will add 100,000 new jobs and $82 billion in additional economic activity between 2015 and 2025.

According to the AUVSI:

Unmanned aerial systems (UAS/drones) 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.

Projected Drone Sales by Unit (Credit: AUVSI)

Teal Group offers even larger projections for the drone market as a whole, predicting $89 billion in sales in the next 10 years, according to its World Unmanned Aerial Vehicle Systems, Market Profile and Forecast.

Further, the FAA predicts as many as 30,000 drones will hit American skies as soon as 2020 — an estimate that’s likely to prove conservative in due time.

And to top it all off, we’re seeing huge investments coming from major tech companies like Google (NASDAQ: GOOG), Facebook (NASDAQ: FB), and Amazon (NASDAQ: AMZN).

Amazon was the first to show interest when it revealed it was testing drones for a potential drone-delivery service called Prime Air. The story was picked up by countless media outlets and even earned CEO Jeff Bezos a slot on 60 Minutes.

Facebook then dropped $20 million on UK-based drone company Ascenta in March 2014, and Google purchased drone maker Titan Aerospace for $60 million in April.

Coupled with multibillion-dollar industry projections, investments from these big-name players are enough to tell us the drone industry will be absolutely massive.

For investors, this all spells nothing short of an opportunity. Here are three unique ways to play this emerging industry:

1) Semiconductors

For drones to work effectively, they will need a wide range of internal components. This includes MEMS sensors (accelerometers, gyroscopes, magnetometers, and often pressure sensors), GPS modules, powerful processors, and a range of digital radios. Together, these components tell a drone where to go, how to orient itself, and how to avoid collisions (among other things).

A major upside to investing in these companies is that many of the components are either already being used in today’s smartphones or have further applications outside of drone use (particularly in robotics). Even if the drone industry is slow to take off, these companies are diversified enough to diminish any significant risk.

Intel (NASDAQ: INTC): A Semiconductor Play

Intel kicked off the International Consumer Electronics Show (CES) with a bang during its keynote earlier this year.

The company revealed a highly diversified lineup of products and innovations, the most notable being its RealSense technology.

RealSense uses 3D cameras that perceive depth and motion and relays that information to relevant software. Applications for RealSense range from 3D scanning to gesture control to holographic Minority Report-style interfaces.

But the most eye-catching display from Intel was a demonstration of how RealSense can be used to create collision avoidance for drones. In partnership with private drone manufacturer Ascending Technologies, Intel showed off what are essentially self-flying drones, capable of navigating from point A to point B while avoiding obstacles.

Demonstrators even played a game of “drone-pong,” using their bodies to push a drone back and forth as it continuously avoided crashing into them.

For all intents and purposes, these drones can “see” the world around them, interpret it in three dimensions, and respond accordingly.

This is ultimately the kind of technology that will separate commercial drones from recreational ones. It will allow companies to release drones out into the open world without endangering the people or property around them (fingers crossed).

To be clear, Intel has no plans (that we know of) to market its own drones. Instead, the company is focused simply on empowering them from within. This is the role Intel has taken with PCs, and it’s the role it will continue to excel at as time moves forward.

Of course, you don’t buy Intel just because it’s setting itself up as a component provider for drone OEMs.

Instead, you buy the company because it’s proven itself capable of adapting to changing trends time and time again.

Intel has long been the epitome of its “Look Inside” slogan, having developed a diversified line of verticals across PCs, tablets, and mobile phones. The key to Intel’s success is not in a particular chip, but rather in its ability to diversify across multiple consumer electronic segments.

Over the next decade, there will be three primary new trends in consumer tech: wearables, the Internet of Things, and drones. Intel is attacking each one just as it has done with PCs, laptops, and mobile devices.

Expect the company to continue its semiconductor dominance for the foreseeable future, drones included.

2) Imaging

As we mentioned earlier, the agricultural drone market is poised to hit $3 billion within three years after the FAA opens the commercial airspace. In 10 years, the figure is expected to hit $30 billion.

Extensive consolidation of farmland has led to massive fields that cannot be traversed by land in a timely manner. Instead, farmers now need to view their land from the sky.

This point of view can be obtained with satellite imaging, planes, or helicopters. However, these methods provide low-resolution images and/or are very expensive. Autonomous imaging drones offer a better service at a cheaper price, which is exactly why the AUVSI expects precision agriculture to see substantial growth in the next two decades.

Autonomous farm drones can take off, fly, and even land without human assistance. These drones are used to survey large farms to increase efficiency and productivity in several ways.

Drones will allow farmers to spot disease and general problems with their crops faster than with satellite or conventional aerial imaging. These drones can be deployed on-site daily due to their small size and, more importantly, low expense.

Second only to physical control/navigation, imaging systems will be crucial for this form of surveillance. The more detail, the better.

Ambarella (NASDAQ: AMBA): An Imaging Play

I know what you’re probably thinking: How is GoPro not the imaging play for drones? After all, the company is developing a line of multi-rotor drones equipped with its widely popular high-definition cameras, right?

Yes, that’s true, and GoPro would be a great stock to own — if only it weren’t trading at 185 times earnings. But alas, GoPro is still one of the most overhyped stocks on the market, even after losing nearly half its valuation since late September.

So how do you get in on drone imaging without owning shares of GoPro? Well, you buy the company supplying it.

Ambarella is the exclusive supplier of GoPro’s system-on-a-chip technology.

The chip enables the cameras to record 4K ultra HD video up to 30 frames per second (or 1080p at 120 fps) at a fraction of the power and storage of rival chipmakers.

Without Ambarella, GoPro probably wouldn’t even exist. The latter company is best viewed as a brand. The former is a provider of essential technology…

As the drone industry ramps up, so will the competition, but until a company can beat the efficiency of Ambarella’s chips, the company is protected by a fairly wide moat.

3) Manufacturing

Last, but certainly not least, are the actual drone manufacturers themselves. We’re not talking about military drone makers, though — we’re looking at pure plays that are going to benefit from incoming commercial regulation.

It’s worth noting that this is a category you need to be especially careful with. Because pure plays are so scarce, many investors already know about them. Likewise, these are the most obvious investments in the drone industry.

The danger with this is that hype can easily inflate the price of these stocks. It’s important to avoid purchasing at inflated prices (even if the company does have a promising future ahead of it).

Elbit Systems (NASDAQ: ESLT): A Manufacturing Play

Elbit produces a variety of unmanned vehicles, ranging from a portable 7kg reconnaissance plane to a 4,000kg automated boat outfitted for surface and anti-mine warfare. It also provides ground-based drones and unmanned services such as operation and maintenance.

In addition to drones, Elbit’s products include thermal and laser imaging, head-mounted displays for infantry, and various aerial navigation systems.

Elbit offers four unmanned aircraft systems including:

• Hermes 900: 1180 kg / 350kg payload / 36 hours flight
• Hermes 450: 550 kg / 180kg payload / 17 hours flight
• Hermes 90: 115 kg / 25 kg payload / 15 hours flight
• Skylark I-LE Mini UAS: 7.5 kg / 1.1 kg payload / 40 km range

You likely won’t see Elbit entering too many commercial applications outside standard military defense anytime soon, but the company’s product line has so far proven versatile enough to not take that idea off the table.

Until next time,

Jason Stutman

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