Don't think that yesterday's announcement that AeroVironment (NASDAQ:AVAV) would be allowed to fly commercial drones over land wasn't a big deal for the drone industry.
BP (NYSE:BP) selected AeroVironment's Puma AE drones to conduct day-to-day operations like 3-D mapping over the North Slope, which will improve safety and efficiency in Alaska's harsh environment. The multi-year deal will be a big test for AeroVironment, BP, and the Federal Aviation Administration, which is trying to determine how to regulate commercial drones.
Leading the commercial drone revolution
AeroVironment may not be the first company you think of when you hear the word "drone," but it has been a leader in the niche market of small military drones for years now. What BP and AeroVironment are doing with the Puma AE drone is essentially using a military drone for commercial work. It's been proven to be reliable, has a relatively long range, and was designed for surveillance, so there's no point in reinventing the wheel.
For the time being, the opportunity is also small enough that aviation giants like Lockheed Martin and Northrop Grumman have largely left the small commercial drone market alone. Boeing (NYSE:BA) acquired drone maker Insitu for $400 million in 2008, but even that company focuses on making larger drones than AeroVironment does. For a company with $86.6 billion in revenue last year, the potential in the drone market is a small blip on the radar.
This leaves AeroVironment to gain a first-mover advantage as commercial drones are tested, and the opportunity is nothing to sneeze at. The FAA predicts that 7,500 drones could be in the air by 2018, and it still doesn't have regulations that spell out what's legal and what isn't.
Where drones are going to fly first
The practical applications most talked about for using drones aren't where you would typically find high-tech aircraft. Oil companies have expressed a lot of interest, and so have farmers, who would be able to get a peek at fields from the air as a more cost- and time-efficient way to monitor crops. These types of applications will be where drones get their commercial start, which is why they're where the FAA is currently testing.
AeroVironment is also making small drones that can be used in law enforcement to get an aerial view of suspects.
Don't expect a pizza or a package from Amazon to be the first place you see a drone nearby. A corn field or a police car will be a more likely sighting early in commercial drone development, because that will be easier for the FAA to control.
AeroVironment's first-mover advantage
Operating out in open space under the FAA's eye also presents less liability for companies. Remember that commercial drones still aren't legal, and as fun as they may be, they could be grounded if law enforcement chooses to do so. Therefore, dominating the markets that will be legalized will be important in an industry that will eventually fall under heavy regulation.
AeroVironment is my bet in this nascent industry, and it could be a big winner over the next decade.