The outlook of AgEagle Aerial Systems (NYSE:UAVS) stock is actually quite complicated at this point. As many others have pointed out, it does appear that Amazon (NASDAQ:AMZN) plans to test the company’s drones.
But regulatory restrictions could prevent the e-commerce giant from deploying drones on a massive scale anytime soon. Despite that potential obstacle, however, I do recommend that risk-tolerant investors buy a small amount of AgEagle’s stock.
Amazon Probably Intends to Try AgEagle’s Drones
Another InvestorPlace columnist, Luke Lango, recently wrote an article which convinced me that Amazon likely does indeed plan to try out AgEagle’s drones.
Among other points, Lango noted that the company had reported “follow-on purchase orders for its drones from an unnamed ‘major e-commerce company’ and that AgEagle had moved its headquarters and factory very close to the site of a planned, large Amazon warehouse.
Further, a leaked video that showed a logo with both companies’ name on it and included footage of “AgEagle’s founder unloading an Amazon drone from its crate” surfaced, Lango noted.
This May Be Only a Test
On Aug. 31, CNBC reported that the FAA had approved Amazon’s application to use drones for delivery. Moreover, according to the website, the agency gave the company a waiver of regulations which require operators to remain within the physical line of sight of drones.
However, Amazon said that, for now, it only plans to test using drones for deliveries.
There are many other federal regulations which could make it difficult for the e-commerce giant to launch drone deliveries on a massive scale.
Specifically, drones are not permitted to fly over people who are not in a covered vehicle or building, and they cannot “fly near other aircraft, especially near airports.” Finally, they are not allowed to fly more than 100 miles per hour.
Another possible limit on Amazon’s use of AgEagle’s drones for delivery is the fact that the two drones currently marketed by the company can apparently only fly for a maximum of 400 acres or one hour, whichever comes first. Moreover, the company’s drones are primarily used in agriculture, and its website indicates that it has only recently begun developing delivery drones. Since farms tend to be isolated, AgEagle probably doesn’t have much experience with developing drones that can avoid people and planes.
I think it will take Amazon and AgEagle time to develop and launch effective delivery drones that comply with all federal regulations. Consequently, it will likely be at least two or three years before Amazon uses AgEagle’s drones on a massive scale.
Walmart’s Example and Self-Driving Cars
Encouragingly for the owners of UAVS stock, Walmart recently unveiled plans to launch “on-demand deliveries of select health and wellness products in the U.S. early next year.” The retail giant is also launching “a pilot project for delivery of grocery and household products.”
But the two companies that are supplying drones to Walmart for these projects — Flytrex and Zipline — appear to have meaningfully more experience with using drones to facilitate deliveries than AgEagle. Further, Walmart’s stores tend to be located much closer to residential areas than Amazon’s warehouses. It is likely making it much easier and cost-effective for Walmart to use delivery drones than Amazon.
Even though it may take years for AgEagle to secure a big drone order from Amazon, UAVS stock is likely to climb. Especially over the next year or two as the two companies partner to develop delivery drones.
I believe that because of the precedent set by companies that develop technology which enables self-driving cars. For example, Cruise, the start-up which developed self-driving technology and was ultimately bought by General Motors (NYSE:GM), was valued at $19 billion in May 2019, even though its products had not yet generated meaningful revenue. And Argo, which also developed autonomous-driving technology and was ultimately acquired by Ford (NYSE:F), received a $7.5 billion valuation in July, even though its products have also not generated significant sales.
Drones are not as cool as self-driving vehicles and in all likelihood will not be as lucrative as robotaxis. Investors are still likely to bid up UAVS stock in anticipation of an eventual big deal from Amazon.
The Bottom Line on UAVS Stock
Investors who expect AgEagle to get a huge order from Amazon within six months are likely to be disappointed. And Amazon could, after testing AgEagle’s drones for awhile, decide to turn instead to a company that has more experience developing delivery drones.
Nonetheless, if Amazon does stick with UAVS stock, the shares are likely to rally as the two companies work together.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.