Market Overview

Is The Drone Industry Finally Ready To Take Off?

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Is The Drone Industry Finally Ready To Take Off?

When United Parcel Service, Inc. (NYSE: UPS) last October made its first medical delivery by drone, it may have finally begun what drone advocates have been touting for a decade — a new era when unmanned flights may become just as normal as those in aircraft with pilots.

There are a couple of areas where drones are already being fairly widely used: military use and aerial photography. But the commercial uses that the industry has been talking about for years may finally be about to take off.

"We estimate the military will remain the leading driver of technology and innovation in the next five years, but the emergence of commercial applications (drone delivery) and select industrial applications will foster a broader ecosystem that we believe will eventually drive significant capital allocation and growth," wrote Canaccord Genuity analyst Ken Herbert in a recent note on the burgeoning industry. "The drone market should continue to attract significant capital and investments."

Here's a look at the three main use-cases.

Commercial Use, Such as Delivery

In October, UPS's Flight Forward unit got the government's first approval to operate what essentially will be a "drone airline," and launched the first paid flight that flew "beyond line of sight," or past where the operator could see it. The drone, made by privately held Matternet, made a medical delivery in North Carolina.

"Package delivery and logistics represents one of the more visible and economic opportunities," Herbert wrote. "We believe this market is in its infancy but could easily surpass $5B globally by 2025 and is expected to see very fast growth."

 

In its most recent aerospace forecast, the FAA agrees, saying it expects the commercial drone market to triple by 2023.

Other big potential players: Amazon.com Inc. (NASDAQ: AMZN) and Alphabet Inc. (NASDAQ: GOOGL), who both are expected to have drone delivery soon.

The Military

Herbert estimated the global military drone market is worth about $5 billion. And it's not just drones that spy or fire missiles.

"We believe we are in the early innings of a major sea change in the use of unmanned systems across domains and for support purposes, such as logistics," Herbert wrote. "Moreover, the proliferation and advancement of drones is creating a vibrant counter-drone market."

It's also not just unmanned aircraft but undersea and land-based unmanned vehicles as well, he said.

Some of the big players in the design and making of military drones include privately-held General Atomics, and Northrop Grumman Corporation (NYSE: NOC). Major makers of drone engines include Honeywell International Inc. (NYSE: HON) and United Technologies Corporation's (NYSE: UTX) Pratt and Whitney.

Herbert highlighted another company recently, Kratos Defense & Security Solutions, Inc (NASDAQ: KTOS), which is working with Dynetics, recently acquired by Leidos Holdings Inc (NYSE: LDOS), on "swarming Gremlin drones" for a Department of Defense program The DOD envisions swarming drones that deploy from a larger mothership — like a transport aircraft — and swarm in large packs behind enemy lines for recon or search and destroy missions.

Herbert who has a Buy rating and $25 price target on Kratos.

Industrial Drones In Infancy

The industrial drone market is just getting going, Herbert said, estimating it may be worth about $1 billion. Still, it could grow to more than $30 billion by 2030.

Main industrial uses for drones include agriculture, and law enforcement and first responder use, he said.

Related Links:

The Now Corporation To Use Zena Pay's Drone Smart Farming Solution

'At The Forefront Of A Revolution': A Chat With Drone Maker Wingtra

Latest Ratings for UPS

DateFirmActionFromTo
Jan 2020Credit SuisseMaintainsNeutral
Jan 2020Wells FargoMaintainsOverweight
Jan 2020UBSMaintainsBuy

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