To drone or not to drone

5 min read

There is a revolution afoot, in unmanned aerial vehicles (UAVs); which are sometimes known as small unmanned aerial systems (SUASs). Forget the acronyms – most people call them “drones.”

Either way, what we are talking about are miniature pilotless aircraft, controlled remotely, which can fly anywhere they are directed, within their operating parameters. They are used to carry video and static cameras for photography and videography, and various sensors, to perform commercial and military inspections and operations; some can carry small loads and equipment.

Like the internet and global positioning system (GPS) before them, drones are following the well-worn path from government and military origin to become powerful tools for businesses and consumers.

Drones are about to become a part of everyday life

In areas such as filming movies and TV shows, real estate photography, inspecting and monitoring the condition of buildings and infrastructure, construction surveying, precision farming, mining and environmental applications, drones are already a commercial fixture.

Governments use them for police work, border patrol, search-and-rescue, fire department. Locally, Surf Life Saving Australia made headlines with the Westpac Little Ripper Lifesaver to assist with beach patrol and rescues. As has been widely reported, many retailers (most notably, Amazon and Walmart) are trialling drones for delivery. Norwegian shipping line Maersk has tested them for shore-to-ship deliveries, and is looking at drones for lookout duties and inspection, both internal (cargo tanks) and external.

Last year, Goldman Sachs predicted that drones could evolve into a US$100 billion market by 2020. Pricewaterhouse Coopers is even more bullish, projecting a market closer to US$130 billion by then.

Investing in drones

Investing in the drone revolution, however, is not straightforward, particularly if you want to invest directly in drones. 

In the US, the PureFunds Drone Economy Strategy ETF (NYSE code: IFLY) was established in March 2016 to provide an investment that tracks the drone economy: it invests in companies across the globe that are actively involved in the development, research, or utilisation of drones. Over the last 12 months, the tiny IFLY (it is capitalised at just US$29 million, or $36.7 million) has returned 35.4%, almost twice the return of the stock market benchmark, the S&P 500 Index. 

IFLY’s holdings include some of the biggest names in aviation, defence and technology: Northrop Grumman, Lockheed Martin, General Dynamics, Dassault, Airbus, Boeing, BAE Systems, GoPro, Honeywell and Thales, to name a few. But IFLY cannot invest in the “Apple and Samsung of the drone world,” private Chinese companies DJI and Yuneec: DJI is estimated to have a market share of about 70% in drones, but Yuneec is hot on its trail, having received investment from US tech giant Intel. 

Here in Australia, the Australian Securities Exchange (ASX) hosts several small companies working in the drone field. 

Canberra-based defence technology firm XTEK (ASX code: XTE) describes itself as a “homeland security” specialist, the only such listed company on the ASX. It provides protective security, tactical and forensics solutions to the government, law enforcement, military and commercial sectors. In July 2017, XTEK signed a $42 million acquisition contract to supply and maintain a fleet of drones to the Australian Defence Force (ADF). Capitalised at $44 million, XTEK made a profit in FY17, but did not pay a dividend. 

DroneShield Limited (DRO) works on the other side of the drone world: it is a drone security company whose main product is a drone detection system that protects people, organisations and critical infrastructure from intrusion from drones. The company’s technology uses proprietary software and hardware to detect drones up to one kilometre away – that would usually be invisible to radar, camera and radio frequency-based systems – and instantly alert users in real-time through multiple channels. 

DroneShield’s second product, the DroneGun tactical drone jammer, augments the drone detection system by jamming the communications between a drone and its remote pilot. An optional GPS-jamming capability is also available to customers, where lawful. DroneGun also triggers the “return to home” function, which then helps the DroneGun’s user to track the pilot. This makes DroneShield the only company in the world offering both drone detection and handheld rifle-style tactical drone countermeasures. 

Interestingly, DroneShield thought that its customers would come from defence installations, prisons, national borders, secured sites, manufacturing plants, power plants, airports, hotels, real estate assets, stadiums and public events (such as the Boston Marathon). But it soon discovered a market it did not expect, in ultra-high-net-worth individual customers who were interested in deterring unwanted intrusion, ranging from senior executives to celebrities wanting to ward off paparazzi photographers using drones. 

Capitalised at $29 million, DroneShield is still a loss-maker, although its revenue and marketing opportunities are surging, and is not expected to break through into profitability until 2018: The stock listed on the ASX in June 2016 after being issued at 20 cents: having peaked at 49.5 cents in February, the shares have returned to 20 cents.

The anti-drone technology

Then there is the ASX-listed Department 13 International (D13), which in late 2016 presented its Mesmer drone surveillance system to the invitation-only Black Dart, the US military’s leading counter-drone exercise. The Mesmer technology enables operators to detect, identify and mitigate hostile or nuisance drones across a range of national security, defence and commercial scenarios by taking control of the drone when it flies into a defined exclusion zone.

In effect, Mesmer manipulates the protocols being used by the drone’s operator – speaking the same language as the operator’s transmitter does – and making the drone land safely.

Department 13 sold its first Mesmer unit in the June 2017 quarter, and has sold another five so far this quarter. But it is a long way from profitability. At a share price of 10 cents, Department 13 is capitalised at $54 million.

Investors be warned: while the drone industry is growing quickly, and has huge potential, the local exposures are early-stage technology companies, with all of the added risks that status entails.

Software and parts

Investors might also consider less direct ways to expose their investments to drone technology, ranging from suppliers of components to drones to those incorporating drone technology within their business. This approach may be more expensive with a range of risks separate to those specific to drones.

Manufacturers of drones still rely on components from other suppliers, be it remote controls or cameras. While these suppliers have the potential to gain from increasing drone usage, they may also be buffered from its risks by existing broader service bases. An example of such a company is US company FLIR systems (NASDAQ: FLIR) which specialises in the design and production of thermal imaging cameras, components and imaging systems. It supplies a range of industries, from car manufacturers to medical equipment, and now also drones.

Likewise, software companies which incorporate a drone aspect to their products may also be able to access the drone revolution. This could relate to operational software – but also extends to designers of software like land-mapping for agricultural, mining and engineering purposes which could translate drone imagery to 3D mapping.

Those companies incorporating drone technology within their businesses in a sustainable way could also be of interest. Companies like Amazon (NASDAQ: AMZN) are already expressing plans to incorporate drones into their delivery processes rather than building the technology themselves, while others like Boeing (NYSE:BA) are adding drones to their existing suite of products and technology meaning they are not reliant on drones for revenue but may benefit from any growth. These companies, of course, have their own challenges and risks but offer an alternative exposure for investors interested in drone technology.

Like most new and innovative technology, drones are interesting to many companies. The challenge is to sift those who are able to capitalise on the technology in a sustainable way from those without structures and planning for the long-term.

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Information current as at 10 October 2017. This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This article may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material.

©BT Financial Group 2017