The drone industry is one of the elements driving the Fourth Industrial Revolution. With their roots in military development, drones are now common recreational gadgets, but they have more to offer: their potential to improve efficiency, decrease costs and reduce CO2 emissions is attracting a great deal of attention across many industries.
Drones, or uncrewed aerial vehicles (UAVs), come with several degrees of autonomy that range from being fully remote-controlled to being able to fly and navigate automatically, thanks to on-board flight-planning software combined with GPS and sensors. Autonomous drones use cutting-edge technologies, such as AI and lidar sensors, to model and recognise their surroundings as well as avoid obstacles.
Already today, drones are a common tool in a range of industries: they are used for mapping and controlling progress on construction sites; in agriculture, drones help spray crops and assess their health; drones also reduce risks in the oil and gas industry, minimising employee exposure to working at height and other hazardous environments. Further technological progress and development of AI algorithms would help autonomise current applications even more, ultimately leading to a larger commercial drone use. In the future, drones could become an integral part of the transport and logistics industry, improving the costs and efficiency of delivery to the client as well as operating in warehouses and driving inventory without human involvement.
Clear skies ahead
Estimates from ARK Invest, although some might argue they are optimistic, predict that the global parcel drone delivery revenue could reach $115bn in 2030. Drone delivery platforms could generate around $275bn in revenues, drone hardware sales could grow to almost $50bn, while mapping revenues coming from the data acquired with sensors and cameras on-board drones could amount to $12bn.
According to PwC, the usage of drones by commercial organisations and the government will lead to a £42bn increase in UK GDP by 2030, that is 1.89% of the GDP. Net cost savings to the UK economy are estimated to be £16bn, while a total of 76,000 drones are expected to operate in the UK’s skies.
In April, the UK Civil Aviation Authority (CAA) issued a permission to a West Sussex-based drone company Sees.ai allowing it to operate trial flights beyond an operator’s visual line-of-sight, or BVLOS, at three locations in the UK. Before then, all BVLOS were banned in the country, limiting the development of the technology needed to upscale logistics and transportation by drones. In January 2021, a Massachusetts-based company American Robotics received a similar permission from the US Federal Aviation Administration. Another American company Zipline is expecting to gain permission to operate long-distance, unmanned flights in the US this year. Zipline is currently valued at $2.75bn and became known for supplying hospitals with blood, medicine and vaccines in Africa.
Not without turbulence
Geopolitical tensions between China and the US have not spared the drone industry. The US authorities recently sanctioned China’s DJI, the world’s largest commercial drone maker, accusing it of breaching human rights in China. This will make it difficult for DJI to secure American supplies and might disrupt the global market for camera drones.
The tensions present a challenge for the US as well: in 2019, former US President Donald Trump ordered the grounding of all 810 drones used by the US Department of the Interior as they were produced or contained parts made in China. The department later issued a memo for the incoming Biden administration, informing them that camera drones developed by the Pentagon are unable to adequately replace the banned aircraft. Although the Pentagon spent more than $13m on the development, their drones cannot match the functionality and cost of those assembled in China, being 8-14 times more expensive.
In late 2020, Amazon became another example proving the complexity of drone technology. The e-commerce giant first expressed its ambition to use drones for delivery in 2013, however, seven years later it decided to end its in-home drone delivery project and turn to third parties for help.
Some companies to consider
There is a large range of privately owned companies in the nascent drone industry. However, those investors who are keen to catch the earliest developments in this area are presented with some publicly traded companies as well.
AeroVironment designs, develops, produces and supports a range of military products and services, including unmanned aircraft systems (UAS), primarily to organisations within the US Department of Defense (DoD) and to international allies. It also provides tactical missile systems (TMS) and related services for the US Army and develops High Altitude Pseudo-Satellite (HAPS) systems.
In fiscal year 2020, AeroVironment delivered $367.3m in total revenue, 17% higher YoY, with a total income of $41.1m, 13% lower YoY, although R&D expenses increased by 36% in the same period. Most of the revenues, 55%, were generated in the US, while the remaining 45% came from abroad. The company is the Pentagon’s largest supplier of small drones which belong to their small UAS products. Small UAS generated 61% of the revenues in fiscal year 2020, 17% came from TMS, HAPS brought in another 17%, while other products were responsible for the remaining 1%.
AeroVironment would be an interesting choice for those who see military governmental contracts as a source of security. From the fundamental point of view, this company is rather expensive, with P/S=6 and P/E=104, while from the technical point of view, it looks more attractive as the share price is consolidating just below a resistance level.
Investors who are not afraid of high volatility and regulatory risks associated with the geopolitical tensions between China and the US could also consider EHang.
EHang is a young Chinese company that designs, develops, manufactures, sells and operates autonomous aerial vehicles (AAVs) and their supporting systems and infrastructure. The company produces passenger-grade AAVs for transportation and medical emergency services as well as non-passenger-grade AAVs for surveillance, fire extinguishment, power line inspection and last-mile and medium range delivery. At the moment, EHang’s passenger-grade AAVs have been delivered for testing, training and demonstration purposes only. In 2020, the company received approval to carry out trial flights in China, the US, Canada, Austria, Norway and Korea.
In 2020, EHang generated $27.6m in revenues, 48% higher YoY, with a net loss of $14.1m, which is 92% higher YoY, while the R&D costs grew 84%. Air mobility solutions that consist of passenger-grade AAVs sales and provision of logistics service, brought in 59% of the revenues; aerial media solutions generated 37%; while the rest came from smart city management solutions – design and development of command-and-control systems and related facilities and sale of AAVs and other related products.
In February 2021, short-seller Wolfpack Research accused EHang of fraud which led to a 63% decline in EHang’s share price. EHang denies the allegations. Nevertheless, the share price is trading 97% higher since the company’s IPO in December 2019, despite the sharp February fall and overall negative sentiment around US-listed Chinese companies. The company valuation is very high, with P/S=54, and relies on expectations for a booming drone industry and futuristic visions of flying taxis.
The drone industry has a great deal of potential for future growth; at present, however, it is still at an early development stage, at least for commercial use. Large scale rollout of the latter also strongly depends on the pace of change in governmental legislation around the world. There are some public companies that offer an opportunity to enter the market already now, but it remains to be seen who will become market leaders in this area.
Disclaimer: this article is for informational purposes only and should not be interpreted as financial advice to purchase or sell any of the aforementioned securities. The author carries no responsibility for any inaccuracy in the data.