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4 Ways to Invest in the Drone Industry Right Now

  • (0:35) - Andrew Chanin and IFLY ETF
  • (2:40) - What Is The Business Application For Drones?
  • (5:10) - Amazon's Drone Usage
  • (8:15) - Who Are The Leaders In The Drone Market?
  • (12:15) - Will The Drone Market Be Worth $127 Billion By 2020?
  • (14:30) - Episode Roundup:

Since President Trump took office, he has promised massive increases in defense and military spending. Some of the biggest names in the aerospace and defense industries are certainly benefitting, but so are smaller corners of the market, specifically drones.

Drones and drone technology are quickly becoming a huge opportunity for both companies and investors, with the global drone market estimated to reach $127 billion by 2020. During a special edition of the Zacks Friday Finish Line, hosts Maddy Johnson and Ryan McQueeney were joined by Andrew Chanin, the CEO of PureFunds, in order to parse through the quickly evolving drone sector.

PureFunds is a New York City-based research firm that serves as the sponsor of 8 different thematic ETFs, including funds that focus on big data, cybersecurity, and health and medical technology. In particular, Andrew discussed the PureFunds Drone Economy Strategy ETF IFLY, the first ETF focused on the emerging commercial drone market, and one that provides an instrument for investing in this omnipresent technology segment.

State of the Industry

Andrew gave insight into the differences between commercial drones and drones used for military purposes, as well as which industries are looking to benefit from drone technology. Technically speaking, drones are a type of unmanned aerial vehicle (UAV), meaning a drone is an aircraft that flies by itself with no pilot or passengers.

Drones have been used for years by the U.S. military, but are just now starting to be utilized commercially for consumers. E-commerce giant Amazon AMZN is testing drones to deliver packages, while fast-casual restaurant chain Chipotle CMG wants to use drones to deliver its burritos. Even hobbyists can purchase their own personal GoPro GPRO Karma drone to achieve ‘Hollywood-caliber footage,” and that’s just the tip of the iceberg.

Stocks to Watch

AeroVironment Inc. AVAV is probably the purest play option for those looking to invest in drones, apart from rival DJI, which is still a privately held company. AeroVironment is a profitable, small-cap company that has both military and civilian clients, and its Raven drone model is the most widely-used small-scale drone in the world.

Sitting at a #1 (Strong Buy) on the Zacks Rank, shares of AeroVironment have been gaining momentum over the past year, and returned 30.5% compared to the Aerospace-Defense Equipment industry gain of 20.2%. While AVAV stock does have a volatile history, its earnings growth looks promising. For the current quarter, the drone maker expects year-over-year earnings growth of almost 34% and sales growth of 20.56%.

Another way to invest in drones, even if it’s indirectly, is through traditional aerospace companies. One of the biggest aerospace and defense giants today is Lockheed Martin LMT, and the firm is already responsible for many of the drones used by the U.S. military. It continues to put its drone business front and center. Lockheed is also looking to begin manufacturing armed drones, which could be a big boon to its bottom line, especially if the Department of Defense continues to support the sale and use of them internationally.

Lockheed Martin is a Zacks Rank #3 (Hold), with a VGM score of ‘B.’ Its industry, Aerospace-Defense, rests in the top 45% of all industries ranked on the Zacks Industry Rank, and this could improve if President Trump’s defense budget gets approved. Lockheed has posted an earnings beat for the past four consecutive quarters, and has an average surprise of 13.88%. For the current year, the company expects year-over-year earnings growth of 1.16%.

Northrop Grumman NOC, another legacy aerospace company, has also long been a key drone player. Its Global Hawk unmanned aerial vehicles were used in U.S. military operations shortly after 9/11, and became a regular part of procedures since then. Northrop’s largest sales division is its Aerospace segment, which includes drones, and while drones aren’t broken out, the technology remans a significant part of future growth for the company.

Northrop currently sits at a #2 (Buy) on the Zacks Rank. For the current quarter, the company expects year-over-year earnings growth almost 9%, with sales growth of about 3.5% in the same time frame. For the current year, earnings are expected to grow nearly 12%. Northrop has beaten earnings expectations in the past four consecutive quarters, and has an average earnings surprise of 10.87%.

Bottom Line

Like all new technologies, drones are continuously changing, and new investment opportunities will likely arise as the technology evolves. Don’t be surprised if other tech giants like Alphabet GOOGL beef up their drone offerings, following in Amazon’s footsteps. But if you’re looking to add drone stocks to your portfolio today, the list above is a good place to start.

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Alphabet Inc. (GOOGL): Free Stock Analysis Report
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