This article was originally published on January 5, 2015 and updated on June 22, 2015.
Drones have been a headline-grabbing topic for a couple of years now, but few companies have translated that hype into actual drone sales. In fact, very few companies are even approved to fly commercial drone flights.
Amazon.com (NASDAQ:AMZN), which brought attention to drones in a 60 Minutes piece last year, was approved in April 2015 by the FAA to test commercial drone delivery, but limitations like having to be within line of site of a pilot make drones unlikely for widespread delivery anytime soon. Realtors got good news when limited drone usage was approved in the U.S. and restrictions like 400 feet in maximum altitude won't likely pose any problems for them.
Given slow regulatory progress and improved technology, 2015 could be a turning point for the drone industry. As the FAA approves more companies for flying missions on a limited basis and opens up regulations for hobbyists and businesses the industry will expand. Before the year is out, we may see some winners begin to emerge.
The FAA's slow acceptance of drones
Slowly, the FAA is starting to allow drones to be used for commercial purposes. ConocoPhillips was approved to fly over-water missions in 2013, followed in June 2014 by BP and Aerovironment (NASDAQ:AVAV) being approved to fly missions over land in Alaska. In September, six filmmaking companies were approved to use drones on a limited basis.
December 2014 included four approvals for oil and gas surveying, monitoring construction, and mapping purposes. The next step is broad rules from the FAA to regulate commercial drones, which are expected by mid-2016. If they come out on time, there could be a boom in drone activity.
A multibillion-dollar market
Drones for military use are already big business, but commercial drones will open up billions more in potential spending. BI Intelligence estimates that 12% of an estimated $98 billion spent on drones in the next decade will be in the commercial market.
But drones probably won't be used where you might think. Amazon's dream of delivering packages via drone would involve overcoming major technical challenges to prevent drones from hitting one another, power lines, vehicles, and people, not to mention the risk of crashing and hurting someone. Instead, drones will be used in more remote locations for surveying and monitoring.
We've seen this in the commercial drone approvals, which include a number of oil and gas drilling applications. Drones will also expand to farming applications, construction, and security applications, which won't come with the same human risk as something like home package delivery.
Who will win the future of drones?
Companies like Parrot and DJI, which make inexpensive hobby drones, have gained significant share in the early drone market, but in a more regulated market they will have to adjust technology to stay competitive. The FAA is concerned about drone safety, including potential crashes, which will require more sophisticated electronics then hobby drones contain today.
Two companies making an investment in this space are Aerovironment and Boeing (NYSE:BA), through its subsidiary, Insitu.
Aerovironment is a leader in small drones that can be launched by hand. It's already a leader in this space for military applications and was the first company to be licensed to fly commercial missions over land.
Insitu makes much larger drones that are currently being tested in over-water missions. It was actually approved before Aerovironment but was limited to oil and gas missions over water off the coast of Alaska.
As drone regulations are released by the FAA, I think Aerovironment and Boeing will be two of the first to be approved to fly expanded missions and will play a big role in how regulations are written. That bodes well for their long-term future in the nascent drone market.
Travis Hoium owns shares of AeroVironment. The Motley Fool recommends and owns shares of AeroVironment and Amazon.com. 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.
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