Monday, July 13, 2015

We’re Getting Closer to Legitimate Drone Stocks

The FAA has granted 700 approvals for commercial drone use

You’ve probably seen countless videos of outdoor concerts and breathtaking landscapes shot from cameras attached to quadcopters — remote controlled drones. The budding drone market is possibly the most interesting segment of the technology sector, and it’s projected to grow into a $91 billion market within the next 10 years.

This news is exciting for investors interested in drone stocks.

Unfortunately, there aren’t many publicly traded drone companies right now. A number of larger tech companies have experimented with drones, though, and dedicated impressive resources for R&D.

Here’s a look at how close we are to full-fledged drone stocks.

Recreational vs. Commercial Drones

Excluding drones (referred to by the FAA as unmanned aircraft systems, or UAS) that are developed and used by and for the military, all operations are categorized as either recreational or commercial. Due to the relative newness of the consumer drone market, the FAA is still in the process of devising specific regulations regarding drone use by the general public.

In February, the FAA issued a press release with proposed rules and regulations for safe drone operation. However, until a specific set of rules is officially in place, drones used by hobbyists are considered no differently than any other model aircraft. Provided that drone operation is within the confines of FAA Section 336, no license or other special permission is required.

On the other hand, using drones for commercial or business purposes requires prior authorization from the FAA. For example, news media use of drones would be considered a commercial application and require FAA approval under Section 333.

The realm of possibilities for commercial drones is quite significant, yet fraught with regulatory hurdles. Still, as of this writing, the FAA has granted 746 petitions for exemptions under Section 333, which authorizes those companies to use drones for commercial operations.

Of the 746 exemptions, there are surprisingly few publicly traded drone stocks, the most notable being AeroVironment (AVAV). The company manufactures drones and other UAS vehicles, and was granted exemption by the FAA for the purposes of inspecting fixed infrastructures, aerial survey, and patrol operations.

One of the few publicly traded drone stocks, AVAV hasn’t fared too well, down more than 15% in the past 12 months. With a market cap of only $655 million, AeroVironment isn’t a very large company compared to others involved in similar aspects of drone development, but it’s the only company entirely devoted to UAS.

The only other notable publicly traded company on the FAA’s list of Section 333 exemptions is Amazon (AMZN). Amazon received FAA approval in April to begin outdoor testing and R&D related to its Prime Air delivery system, originally announced by CEO Jeff Bezos in December 2013.

Delivering Amazon packages via drone is still a long way off, especially since the FAA hasn’t amended the rules regarding the flying of drones outside the line of sight of the operator. Amazon’s Prime Air concept can’t move forward without this ability.

However, it was reported earlier this week that Switzerland’s postal service has begun testing package delivery via autonomous drones that follow “clearly defined, secure flight paths, which are drawn up by cloud software.” If the Swiss post can demonstrate safe and effective parcel delivery via drones, an FAA amendment authorizing drone stocks to operate a UAS beyond line of sight would only be a matter of time.

Bottom Line on Drone Stocks

Although hundreds of drone companies have received authorization from the FAA to commence commercial operations, the vast majority of those businesses are privately held. AeroVironment and Amazon are the two major publicly traded companies with Section 333 exemptions — the only things we have that are anywhere close to legitimate drone stocks.

The consumer-focused drone industry is still in its infancy, and revisions to FAA regulations prohibiting commercial use and requiring special authorizations are still a long way off.

Regardless, pressure from industry groups and examples of working methodology outside the U.S. should help speed up the legislative process and ultimately remove restrictions that make for-profit use of drones near impossible in many practical scenarios.

Article originally appeared on InvestorPlace (07/13/2015)

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