The Federal Aviation Authority’s (FAA) Apr. 23 press release said it all. Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) drone-delivery startup, Wing, has been granted the first air delivery certification in the U.S; that’s great news if you own GOOGL stock.
After GOOGL tested drone delivery in Canberra, Australia, the FAA has granted the company the right to deliver food and other lightweight products to customers in Blacksburg, Virginia.
But before you go out and use your expected future profits from GOOGL stock to buy something special, you might want to consider that Wing’s business has a long way to go before it’s making its parent a reasonable return on its investment. A really long way.
I know what you’re thinking. Google’s got first-mover advantage. It can’t possibly screw this up, and drones will be a tremendous catalyst for GOOGL stock.
Hey, Alphabet is a great collection of businesses, big and small, established and very early stage. If anyone can make drone delivery work, GOOGL can.
American business history is littered with examples of companies with first-mover-advantage that were incredibly successful: Netflix (NASDAQ:NFLX) and Sirius XM (NASDAQ:NFLX) come to mind. But there are also examples of companies that have failed miserably: Betamax, Atari, and Tivo (NASDAQ:TIVO) are good examples.
Google knows a thing or two about beating a company with first-mover advantage. Its search engine followed several others, including WebCrawler, Lycos, Infoseek, etc. But Larry Page and Sergey Brin just figured out how to make a better mousetrap, propelling GOOGL and GOOGL stock to tremendous heights in the process.
Now that Wing’s got the green light, the shoe is on the other foot for GOOGL.
That’s because Wing’s approval process has cleared the way for other drone-delivery services to expedite their certification with the FAA. Most notably, Amazon’s (NASDAQ:AMZN) Prime Air, which hasn’t gotten off the ground despite development centers in the U.S. and four other countries, will be looking to get in the drone-delivery game.
However, just because more drone-delivery services will launch over the next two or three years doesn’t mean that any of them will be nearly profitable enough to be commercially viable.
Not to mention that consumers’ acceptance of drones is far from unanimous.
In 2017, the Pew Research Center surveyed American adults about their thoughts on drones. The research organization found that 49% of those surveyed would have a problem with drones flying near where they lived and 54% think drones shouldn’t be allowed to fly near people’s homes.
In the case of Wing, its drones will hover 20 feet over a house to which it’s making a delivery, lowering the goods to the ground on a hook. Just because Wing’s proven that it can successfully deliver products to homes doesn’t mean that homeowners are going to buy into the program.
Forgetting the problem of drones flying around the neighborhood for a minute, there’s also the cost factor to consider.
The New York Times recently quoted Wing spokesman Jonathan Bass as saying that drone deliveries would make cooking easier.
“Personally, I like to cook a lot,” Bass said. “I can’t count the number of times I get to the end of a recipe and realize I’m missing one ingredient. To have that delivered straight to my backyard or my front door will be extremely valuable,” he explained.
I get it. I don’t know how many times my wife’s been cooking and asked me to run out to pick up an ingredient she’d forgotten to buy beforehand. I’ve got to jump in the car and drive to the store; that takes time and gas and could result in a fender bender if I’m not paying attention.
Having the ingredient sent over by drone really is the smarter way to go.
The problem is, how much am I willing to pay for $3 in spices? Is a $5 delivery charge reasonable? $10? Where’s the sweet spot between consumer acceptance and consumer resistance?
That’s the question Wing, Amazon, and the rest of the drone-delivery companies are about to find out.
What I do know is that food delivery services such as DoorDash, UberEats, and Grubhub (NYSE:GRUB) have managed to grow and prosper despite reasonably high delivery charges, so there’s a precedent when it comes to consumers’ willingness to pay extra for convenience.
The Bottom Line on GOOGL Stock
If this were a baseball game, I’d say the drone-delivery business is in the bottom of the first inning with extra innings more than likely.
The FAA’s approval of Wing is an important win for the drone industry. Hermits who don’t like leaving their houses will be ecstatic
As for GOOGL stock, I wouldn’t buy it because of Wing.
GOOGL stock should be bought based on the strength of its core business. If any of its other bets, including Wing, turn out to be winners, that’s nothing but gravy.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.