How Investors Can Play Commercial Drone Takeoff

BY REINHARDT KRAUSE, INVESTOR’S BUSINESS DAILY

Commercial drone usage in agriculture, industrial inspection and public safety will take off after favorable U.S. government regulations are announced by late 2016, becoming a “multibillion-dollar” market by 2020, forecasts Piper Jaffray in a research report.

Piper Jaffray estimated the commercial drone market at about $650 million in 2014. If U.S. regulators open up the skies to commercial drones by late 2016, “we believe the UAV (unmanned aerial vehicle) commercial market can grow 30%-plus for the next several years and become a multibillion-dollar annual market opportunity by 2020,” said the report.

The use of commercial drones is largely banned in the U.S., though the Obama administration has granted exemptions on a piecemeal basis. E-commerce leader Amazon.com (NASDAQ:AMZN) has been testing drone-based, product delivery systems. Archer Daniels recently joined a growing list of companies, including Amazon.com and AIG, with approval from the Federal Aviation Administration to test drones for commercial use.

While military applications of remotely-controlled, UAV systems already have created a multibillion-dollar industry supported by Department of Defense spending, Piper Jaffray says commercial usage will be driven by venture capital funding flowing to startups. Among privately held companies to watch, says the report, are consumer drone maker 3D Robotics and Canada-based Aeryon Lab.

San Diego-based 3D Robotics has raised over $99 million in four rounds of funding. Google Ventures has invested startups Airware and Skycatch, the report says.

China’s DJI Leads

China-based DJI Innovations, also privately held, is the world’s No. 1 maker of consumer drones.

“Currently there are only a few pure-play ways to take advantage of the growing drone market from an investor stand point,” said Piper analyst Troy Jensen in the report. “Companies including AeroVironment (NASDAQ:AVAV), Delta Drone, Northrop Grumman (NYSE:NOC) and Lockheed Martin (NYSE:LMT) are ways to gain exposure to drones, but most of these companies are generally focused around military applications.

“Investors could also take an indirect approach to the drone industry and invest in the larger chip and component part suppliers to these drone companies. InvenSense (NYSE:INVN), IXYS (NASDAQ:IXYS), Ambarella (NASDAQ:AMBA), GoPro (NASDAQ:GPRO) and TransDigm Group (NYSE:TDG) are companies that provide gyroscope chips, cameras or other components to civil, commercial and military drone manufacturers.”

Facebook (NASDAQ:FB) aims to launch a solar-powered UAV system to provide high-speed Internet access in emerging markets. Facebook acquired U.K.-based drone maker Ascenta last year, while Google (NASDAQ:GOOGL) bought Titan Aerospace in 2014. Ascenta is part of the Internet.org project, formed by Facebook and telecom companies.
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