1 Drone Company That Shouldn't Be Overlooked

Drones have been a hot topic in 2014 and Amazon.com has gotten most of the publicity after a feature on "60 Minutes". But if you want exposure to drones, Amazon is a terrible place for investors to look. It's a retail company that would use drones as a piece of its strategy and as Michael Toscano, president of the Association for Unmanned Vehicle Systems International, recently told our own Rex Moore, Amazon may be a decade away from launching delivery drones.

In fact, there aren't many companies that will give you direct exposure to drones. But there's one company that is a big player in drones, and you've probably never heard of it.

The Puma hand launched drone is one of AeroVironment's military drones that could make its way to commercial markets. Source: AeroVironment.

The drone maker you've never heard of
Most of the drones you've heard of like General Atomics' Predator are made by giant military contractors. Boeing (NYSE: BA  ) , Lockheed Martin (NYSE: LMT  ) , Northrop Grumman, and General Atomics are the big military contractors that have been building drones for years and will continue to be big players in the market. The problem is, drones are a small piece of a large business for these companies, so investors won't get much drone exposure at all.

The Predator drone from General Atomics. Source: General Atomics.

Investors looking for a more focused investment in drones should take a hard look at AeroVironment (NASDAQ: AVAV  ) , the company who specializes in small drones that are becoming more popular for military applications and have incredible commercial potential. Drones like the Puma, Raven, and Wasp are the three main products made by AeroVironment; each can be launched by hand. The larger Global Observer, which AeroVironment is working with Lockheed Martin on to develop control and integration systems, is its largest drone and is used for national level surveillance.

These military drones made up 82% of AeroVironment's $232.3 million in revenue over the past year, and that's just the start of the company's opportunity.

Commercial drones have yet to get off the ground
The military market is big, but the commercial market is where the real opportunity is and it's not one that competitors can easily attack. Boeing bought small drone maker Insitu last year to enter the market; along with AeroVironment, it's testing drones in one of six FAA-approved test locations.  

The "Humming Bird" from AeroVironment shows how small the company's drones can be. Source: AeroVironment.

The good news for AeroVironment is that it already has three drones that can fit commercial needs, and another, the Qube, is being tested for applications like public safety. The potential opportunity is huge.

BI Intelligence estimates that $12 billion will be spent on commercial drones over the next decade, an amount that takes into account the huge delay until the FAA determines commercial rules. AeroVironment should be a first mover into the market due to its long history as a military supplier and its line of products that fit the commercial space.  

Is AeroVironment an acquisition target?
The other possibility for investors is that AeroVironment could be an acquisition target. As I mentioned above, Boeing bought Insitu for a reported $400 million in 2008 -- military contractors may be looking at the commercial drone business as a place for acquisition rather than a place to start from scratch.  

Lockheed Martin's recent partnership with AeroVironment to develop systems for the Global Observer could be the start of tie-ups between those two companies. AeroVironment would probably cost in excess of $1 billion, but given the potential market size, it's a deal that makes sense if commercial drones are something Lockheed wants to get into.

A great way to play the future of drones
Drones are an exciting market for investors, but with few direct ways to play, the market can be tough to get into. AeroVironment is a great way to enter the drone market and play the future of commercial drones as well as the military market.

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