Are Drones the Next Financial Boom?

Unmanned aerial vehicles (UAVs) are the latest scientific phenomenon to burst onto the scene. Retail and military versions of aircraft that have no human in the cockpit are being built and used at a stunning rate of speed. More commonly referred to as drones, the vehicles serve all sorts of purposes, from top-secret military missions to personal hobby flights. A few retailers have already begun using them for product delivery.

One of the most intriguing investment opportunities to come along in years, drones have been called the “next big thing” by dozens of financial advisors and pundits. In addition to the obvious military uses for missions that are too risky for human pilots, the diminutive helicopter-like gizmos could completely transform consumer markets in dozens of ways.

When the Federal Aviation Administration loosened requirements for drone licenses last year, potential “pilots” began lining up for the $150 test, and the agency expects almost 200,000 new licensees by the end of 2017. Because there are so many potential drone users in addition to military personnel and major retailers, it is reasonable to expect a surge in drone use over the next few years.

How to Invest in Drones

It’s easy to look at the rapidly growing drone market and ask, “What are the best stocks to buy” to take advantage of the trend? A better question might be, “What are the different ways to profit from this new opportunity?”

The fact is, there are several ways to gain exposure to the drone market, and only one of them involves a direct buy into the UAV market. Slightly more conservative approaches are available to anyone interested in this new sector. There are, for example, many companies that manufacture drone components. They offer indirect exposure, as do aerospace corporations that sell sophisticated drones to military entities around the world.

Direct and Indirect Opportunities

Northrop Grumman Corp, symbol NOC, was one of the earliest entrants into the military drone business via its aerospace division. Within a decade, Northrop’s UAV business was bringing in more than 50 percent of the company’s profit. Just a year ago, Northrop had a backlog of drone orders that surpassed $17 billion, which means the aerospace giant will be knee-deep in drone orders for years to come.

AeroVironment Inc., symbol AVAV, is an example of a direct investment opportunity because the company makes drones and sells them to both civilian and military buyers. Most UAV enthusiasts are familiar with AVAV’s “Raven” unit. Raven is currently the world’s most commonly deployed UAV. Nearly 90 percent of AeroVironment’s revenue comes from drone sales. For investors who want to buy into the UAV segment, AeroVironment is a direct play. It is worth noting that AVIV share prices are volatile, but given the newness of the niche and the high-stakes competition, that is to be expected. Due diligence is the watchword, but potential gains are significant.

For investors who are a bit reluctant to buy directly into the UAV market, there are many opportunities to ease in via the components segment. While drone manufacturers may have volatile price fluctuations and company health profiles, component-makers are usually a more conservative bet in any industry.

Ambarella is one such company. Trading under symbol AMBA, Ambarella makes all kinds of HD components and mobile video systems that are part of the UAV universe. In fact, the image-processing portion of GoPro cameras is made by Ambarella. Whether an individual drone maker survives or perishes, Ambarella (and other component manufacturers) will theoretically be able to stay afloat by servicing whoever is at the top of the niche on any given day.

IXYS Corp., trading under the symbol IXYS makes semiconductors that are key components in lots of small drones. Now that the retail, so-called “small-business” drone market is taking off, IXYS stands to profit from being in the right place at the right time.

STMicroelectronics is a Swiss company that is similar in many ways to the above-mentioned IXYS. Trading as STM, the small, high-tech maker of 3-D printing chips and drone components has a penchant for survival in a competitive market. STM has already made a name for itself in the gyroscope tech category of the smartphone market.

GoPro, GPRO: GoPro not only makes mobile cameras but is now manufacturing drones for retail end-users. Based on GoPro’s success at selling wearable camera systems, its new venture into the drone business could be another home run for one of the stars of modern tech companies.

InvenSense, INVN: Similar in some ways to STMicroelectronics, mentioned above, InvenSense makes gyroscopes for use in all kinds of drone systems. Some analysts think such vital, universal drone components are where investor dollars are headed.

Google, GOOGL: Now that the Internet giant has acquired its own collection of robotics companies, the stock could become an effective indirect buy into the drone market.

If scaled-down, mini-drones become as commonplace as some analysts are predicting, these smaller drone component entities could find themselves in an ideal position. As time passes, and military drones give way to corporate, advertising, scientific and, finally, personal-use devices, the drone sector could become massive. The few major manufacturers and component-makers who survive the initial shake-out could become the McDonald’s, Microsoft, and Intel of the drone market.

What is the Future for UAV-based Investments?

With huge retail entities like Amazon and Walmart set to roll out drone delivery on a large scale before 2020, and with increasing military, agricultural, scientific and personal use on the rise, trend-watching investors are keeping a keen eye on the UAV sector for opportunities that could be uniquely lucrative.

Disclaimer: The above discussion of UAV (drone) investing should not be taken as financial advice or a recommendation to purchase, or avoid, particular securities. The company profiles are for informational purposes only. Anyone interested in buying securities should speak with a licensed financial professional before doing so.

Click here to add a comment

Leave a comment: