It's been an up and down year for AeroVironment (NASDAQ:AVAV) in 2014. The stock exploded higher after management reported an encouraging fiscal third quarter, but has fallen slowly in recent months as the excitement wore off and the realities of investing in growth sank in.

AVAV Chart

AVAV data by YCharts.

The stock may have foundered recently, but that doesn't make the long-term prospects of this drone-making company any less exciting. 

Potential for Global Observer has gotten investors excited about AeroVironment this year. Source: Aerovironment.

The excitement over drones has just begun
Two major events have caught AeroVironment investors' attention so far in 2014. The first was an agreement signed with Lockheed Martin (NYSE:LMT) in February to jointly pursue unmanned aircraft development opportunities. The focus of the deal was AeroVironment's high-altitude Global Observer, which the company hopes to gain traction with in coming years.

Lockheed Martin is not only a partner that could provide systems integration for Global Observer, it's a potential competitor as well. The simple fact that it wanted to partner with AeroVironment is encouraging.

Global Observer could be a game changer for AeroVironment. Management has said the drone would sell for tens of millions of dollars apiece; it has already spent $150 million to fund the aircraft. Those are significant figures for a company with $252 million in sales last year.  

The downside of growth opportunities like this is the investment necessary to build out new capabilities. Those costs showed up in the recently reported fiscal first quarter, which saw an 18% increase in revenue but a loss of $3.6 million, or $0.16 per share. These losses will likely continue over the next year or two as management invests in Global Observer, tactical missile systems, and commercial unmanned aircraft systems. 

Drones like this one are being used to map the North Slope in Alaska. Source: AeroVironment.

Commercial drones are here
The second big development for AeroVironment in 2014 was approval to fly the first commercial drone missions in the U.S. AeroVironment is providing commercial flights for BP over Alaska's North Slope, providing geographic data that will help model roads, pads, pipeline, and other infrastructure in the region.  

BI Intelligence has estimated the commercial drone market to be worth $12 billion over the next decade, and AeroVironment is one of only a handful of companies approved for commercial flights at the moment, giving it a leg up on the competition. As regulations are released by the FAA (likely in 2016), this market provides immense potential for the company.

Why investors bid up Aerovironment stock this year
The Lockheed Martin deal and commercial drone flights are a glimmer of hope for a company with huge potential that is still years away. But that excitement also wore off during the summer, and after first-quarter results were released, resulting in the stock dropping recently.

In the long term, few companies are positioned as well as AeroVironment to capture the growing drone market, for military and government purposes and for commercial sales. But this is a long play that investors need to buy and hold while expecting volatility along the way. If you can hang on until the commercial drone revolution takes off, this could be a big winner.

Travis Hoium manages an account that owns shares of AeroVironment. The Motley Fool recommends AeroVironment. The Motley Fool owns shares of AeroVironment and Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.