Drones … once just a spy tool for the military, the unmanned aircraft have finally begun to make headway into the private and businesses sectors. And that’s where the real growth is going to come from. Drones are going to be a billion-dollar business.
That’s because drones are moving from being just a hobby into some serious commercial applications.
Analysts estimate that drones will be making their way into our agricultural fields for soil testing, our construction sites for maintenance purposes and even delivering packages in the near future.
Demand from these new sources has Goldman Sachs predicting that the global market for these devices will be worth a staggering $100 billion by 2020. That’s up from just $552 million recorded in 2014.
Even if it only amounts to just one-fourth of that estimate, that’s still a torrid amount of growth potential in a short amount of time. This is why investors may want to add a dose of drone stocks to their portfolios.
The potential for profit is very real.
The Three Best Stock Plays on Drones
When it comes to drones, AeroVironment, Inc. (AVAV) is the first name many analysts will point to. And there’s good reason for that. AVAV first pioneered the concept of drones nearly 25 years ago.
Since that time, AeroVironment has designed and built hundreds of drone models. The bulk of those have been for the U.S. military. And while the U.S. government is still AVAV’s largest customer, public demand for drones is beginning to change that.
AVAV has begun marketing and designing its products for various commercial industries. By taking its military-grade hardware and tweaking slightly, the firm is already light years ahead of its competition.
That strategy seems to be working. During the first quarter of the year, AeroVironment managed to record more drone sales than it did throughout all of last year, as customers ranging from energy firms to firefighters begin to see the light on drones.
As the leader in drones, AeroVironment isn’t cheap. AVAV stock can be had for a price-to-earnings ratio of nearly 60. That makes it a very expensive growth stock. However, this is a growth industry and as the only pure-player with real profits and customers, that price could be worth it.
As an alternative, sleepy and often ignored defense stock L-3 Communications Holdings, Inc. (LLL) is quickly becoming a dual threat in the world of drones.
For starters, LLL’s main bailiwick has always been providing secure communication systems and specialized communication products for airplanes. Well, military drones need military strength wireless communications to make them operate safely and securely.
After all, you don’t want your spy images or worse, a drone carrying a missile to be hacked and acquired by enemy hands. As military standard issue, L-3’s communications devices are often found in other companies drones.
But LLL isn’t just leaving drones to other players. It has been using them as a way to sell its Intelligence, Surveillance & Reconnaissance applications — i.e., spy equipment.
The firm has been developing a series of drones earmarked for spying. They come with all the latest equipment L-3 has to offer. More importantly, they require less people to operate them, which make them perfect for in-field reconnaissance work. You know … where you actually need to be spying on your enemies.
With that in mind, LLL stock could be a great stealth play on the rise of drones and increased military spending on the unmanned aircraft.
Outside of AVAV and LLL, there’s a riskier option for those interested in making a play on drones.
Things haven’t been going well for action camera maker GoPro Inc (GPRO) lately. A couple of high profile misses and investors have sent the stock crashing in recent weeks. But investors looking for drone stocks may want to consider the beaten down camera maker.
That’s because the firm will finally release its long awaited Karma Drone just in time for Christmas.
The product is considered a must have for GPRO. Other personal drone makers such as Parrot (PAOTF) and DJI already have products that hold GoPro’s action cameras. That’s basically cutting into GPRO’s own bread-n-butter. By getting out there and offering drone/camera packages, it should bring more sales home.
Some analysts estimate that those sales could be worth around $600 million in sales during the first three years after the Karma’s release. While that may be a little rich, even a third of that would go a long way in fixing GPRO’s fortunes.
While it’s not a sure thing for drone success like previous picks AVAV or LLL, GoPro could be one of the drone stocks with the most to gain initially from rising sales.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.