Investing in Drones: Impracticality Could Prevent Profits

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Twenty years ago, airborne drones were ideas reserved for sci-fi films like Star Wars and Buck Rogers. While fun to think about, they just weren’t practically or cost-effective.

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In the past couple of decades, though, flying drones have become commonplace for armed forces and even appear to be on the verge of becoming a common delivery method in everyday civilian life. A handful of U.S. corporations have beta-tested the possibility of using drones to deliver goods — and, for the most part, the tests were successful.

However, before investors jump on the drone bandwagon and buy drone stocks just because those companies have a hand in the design, development or use of airborne drones, it might be wise to apply a basic test of practicality. Moreover, it would be prudent for an investor to consider the true, relative profit potential of certain drone stocks.

Just because a technology is “cool” doesn’t mean it’s viable as money-maker or money-saver.

High-Profile Drones Lack Practicality

To give credit where it’s due, it wasn’t Google (GOOG) or Amazon (AMZN) that first toyed with the idea of using drones to make deliveries. While these two tech-savvy organizations have greatly advanced drone science, it was Domino’s Pizza (DPZ) back in mid-2013 that first tinkered with the idea of using drones to deliver pizza. In fact, a drone successfully delivered a pizza in June of last year.

Though the aerial pizza delivery was mostly a publicity stunt set up by the company’s United Kingdom division, the functionality of drones didn’t go unnoticed. In December of last year, Amazon.com CEO Jeff Bezos announced on 60 Minutes that his company had been developing delivery drones for quite some time. They were far enough along in their development, though, that Bezos felt it was time to let the public in on the news.

Not to be outdone by Amazon, Google announced just last week that it is also developing delivery drones. However, rather than land the drone to make a delivery, the Google concept is to lower the item to the ground by a string, thus keeping the flying apparatus and any nearby people out of harm’s way.

Fun to watch and think about? Certainly. Practical? Not in the least.

Kudos to Domino’s Pizza for doing what Amazon and Google have yet to do — acknowledge that the idea isn’t functional and reliable enough to be anything more than a publicity stunt. Indeed, there are five realities that could permanently crimp the commercialization of drones, thereby crimping and upside of drone stocks.

Reality #1: Battery-powered drones are limited to flights of 30 minutes or less. Amazon suggested its drone-based deliveries would be limited to a ten-mile radius from its hub. While a single drone can zip back and forth to the hub and make several deliveries per day, flying all day imposes a great deal of wear and tear on the machine, and its battery packs. Employing enough delivery drones to replace one delivery truck — and putting them all in the same basic airspace at the same time — would lead to inevitable collisions, destroying the drones and whatever cargo they may be carrying.

Reality #2: Drones are prone to failure, and birds or power lines or other airborne challenges only raise the risk of failure. A broken or damaged drone isn’t just an expensive nuisance. With Google drones weighing in at 19 pounds apiece, if the drone fails in mid-flight above a crowded area or a busy road, it becomes a life-threatening danger.

Reality #3: Even if the safety/reliability issue is resolved, the practicality issue surfaces. How can a drone make a delivery to the right person in an office or apartment building? Drones can only assure delivery if there’s room to land at a specific home address, but lawns aren’t necessarily common or large enough to land in the densely-populated areas Amazon says its drones will cover. (Note that Google has thus far conceded its drones would be best utilized as a means of delivering supplies in an emergency situation, to areas that were cut off from rescue personnel.)

Reality #4: It’s not tough to see that the FAA really, really doesn’t want drones flying crowding U.S. airspace.

Reality #5: Google doesn’t seem to be trying to turn drones into a profit center — at least, not yet. And, even if it did, it would be such a small part of its revenue stream that it’s impossible to even label GOOG as one of the few drone stocks out there. For Amazon, drones are allegedly becoming the middleman for many of its deliveries, which makes it better-qualified as a drone play. But in either case, the cost, liability, and sheer logistics of using drones to make deliveries is apt to up-end the idea before it ever gets out of the conceptual stage. Said another way, the fiscal math of drones just doesn’t make sense.

Drone Stocks to Buy

So what drone stocks should an investor consider to capitalize on the drone revolution? As was mentioned above, military drones have more than proved themselves. And, given that the military doesn’t have to make their drones turn a profit, it’s not as if there’s a reason to pull the plug these programs.

Some of the bigger names in military drones are Northrop Grumman (NOC), Lockheed Martin (LMT), and General Dynamics (GD). Like Google, however, drones are only a small piece of their revenue, so those drone stocks only offer a small bit of drone-based upside. To truly take advantage of the rise of drones, only two military contractors and developers of any consequence are largely devoted to drone design and construction.

One of them is AeroVironment (AVAV). It offers a variety of unmanned aircraft systems to the military. Most of these drones are small (hand-launched) and deployable from the front lines, and help their users do some quick reconnaissance. The other is Textron (TXT). Textron makes “the big ones” that tend to garner most of the attention when the subject of drones pops up. They’re either catapult launched or roll into takeoff like a conventional aircraft.

More importantly, Textron’s drones are capable of a variety of tasks, up to and including establishing targets for ordinance. Although drones are only a modest part of Textron’s business, it’s quickly becoming a key component of the revenue mix. Indeed, Textron is the name in military drones.

None of this is to say that commercial and private-sector drones will never have a future. In fact, BP (BP) is employing them to better monitor and manage some of its properties in Alaska.

But it’s a distant future until swarms of delivery drones become a reality, and none of the companies flying into that proverbial airspace are in a position to truly benefit shareholders with the technology. Military drones are the only use that’s proven and viable at this point, and the only one investors need to bother with.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/drones-drone-stocks/.

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