Nowadays, police can send in a drone to a potential dangerous situation. Movie directors can shoot scenes from impossible angles. Farmers can survey crops without needing to visit their fields. Amazon will use drones to literally drop your package at your door. Before you know it, the drone will be everywhere. This is why I think this industry will have explosive growth.
Imagine if you had invested in Apple 10 years ago, before the first iPhone came out. You would have made 2500% return. I tell you, the drone industry today is just like Apple 10 years ago. This is why big companies like Amazon, Google, Facebook and Intel are not letting this opportunity escape and have been buying companies with drone innovation technology.
Let me first introduce the drone industry.
Currently, there are three major segments. You all know the military uses drones for surveillance and combat missions. These drones are operated by large defense companies like Lockheed Martin, Northrop Grumman and Raytheon. They represent 70% of the drone market. Actually, I am more interested in drone commercial applications. They are mainly used for unmanned surveying and mapping in the energy, construction, engineering and security industries. Although the revenue share is just 8%, that is the main reason we want to invest.
Also, most military technology is not transferable. This is why so many university scientist are starting private companies in Silicon Valley. By 2019, the commercial sector will have more than $5 billion in revenue and will surpass the defense sector. I had the chance to talk to two experts in this field and these were their words:
“Technology is there, but everybody is trying to find out how to apply it. The sky is the limit.”
Now, you’ve probably seen the use of consumer drones. But I want remind you I’m not here to show off my model airplane.
Of course, three buzz words for the drone industry are “Regulations! Regulations! Regulations!”
If you want to use a drone for recreational purposes, you need to follow FAA regulations stated in Section 336.
For commercial use, the transportation department makes each individual company apply through the 333 Exemption. Approved companies can use drones in their business. The government does not really know how to regulate the aerial transportation of unmanned vehicles. This is why there is not a set of fixed rules for all companies.
The FAA looks at this case by case. Currently, there are 4000 processed exemptions, 90% of which were approved. However, there are still thousands of companies waiting for the approval.
For example, Amazon applied twice last year for the exemption. They were denied both times. As a result, they went to England and Australia, where the rules are more flexible. After that, guess what happened. The FAA approved Amazon’s third application!
These rules are expected to relax by June 2016. That is why I estimate the commercial drone market will see explosive growth by mid-2017. US regulations will be toned down with the rest of the world.
Index Creation/Recent Performance
By now, I hope I have convinced you that drone industry has explosive growth potential ahead.
A typical drone which is composed by 8 different parts. It has a battery, chip, gyroscope, GPS, camera, blades and a motor. But I cannot find a single company that manufactures an entire drone. This is the reason I had to find 9 companies.
These companies have a current or future main business focus in the drone industry. Three companies are drone retailers, AeroEnvironment, Parrot, and Drone Holding Corporation. Drone retailers buy 80% of the parts from other companies. That is why I included four parts manufacturers (Invensense, IXYS Corp., STMicroelectronics and Ambarella). My index also includes one drone military company (Elbit Systems) and one data analytics company (Trimble Navigation Holdings)
|AVAV||AeroVironment Inc||Aerospace & Defense|
|AMBA||Ambarella Inc||Semiconductor Equip. & Materials|
|PARRO||Parrot SA||Communication Equipment|
|DRNED||Drone Aviation Holding Corp||Software – Application|
|ESLT||Elbit Systems Ltd||Aerospace & Defense|
|TRMB||Trimble Navigation Ltd||Scientific & Technical Instruments|
|STM||STMicroelectronics NV ADR||Semiconductors|
I weighted each company in the index differently so that revenue growth and stock return has the highest correlation. The biggest weight is 20% on IXYS and the smallest is 5% STMicroelectronics
That being said, the Drones 9 index has outperformed the market by 50% over last 5 years.
So let’s get to the numbers.
My Pro Forma is calculated by averaging historical growth from the index, industry professionals forecast growth and weighted analyst forecast for each individual company. This gives me a revenue growth of 17% for 2016 and 27% for 2017. Earnings Growth will be 75% next year.
For my valuation, I used the Holts Model. I came up with an undervaluation of 3%.But keep in mind, I am not recommending this index because of its undervaluation.
Because of the explosive industry growth potential;
Because we want to be the first movers;
And because it is the first ever drone index;
I recommend that the Roland George Investments Program invest $100,000 in the Drone 9 Index.