What Investors Need to Know About Camera Drones

Smaller, faster, cheaper -- better! With every passing day, the mantra of the semiconductor industry is invading the world of camera drones. For example, it's been 20 years since AeroVironment (NASDAQ: AVAV) flew its solar-powered Pathfinder unmanned aerial vehicle to a record altitude of 71,500 feet.

With a 98-foot wingspan, a 20 mph top speed, and a multimillion-dollar cost, AeroVironment's Pathfinder unmanned aerial vehicle was big, slow, and far from cheap. Since then, AeroVironment and competing builders of UAVs have built increasingly smaller, faster, and cheaper flying camera drones. This is great news for consumers, who can buy a cheap drone, with cameras included, for just a few tens of dollars -- or a top-of-the-line DJI Phantom for just a few hundred dollars.

But what's good news for consumers may be lousy news for investors.

Smaller and cheaper ...

Six years ago, AeroVironment epitomized the trend of downsizing from big to small drones when it prototyped a Nano Hummingbird for DARPA. With a wingspan of just 6.5 inches and a weight of only two-thirds of an ounce, AeroVironment designed and built the prototype drone -- which looks like its namesake bird -- for a total cost of just $4 million.

Hummingbird was an extreme example of how small flying camera drones can become, of course. More mainstream drones, built for more mainstream customers, don't need to be nearly so tiny, so maneuverable, nor so close to birdlike in appearance as a drone built for the Pentagon's spymasters.

Fact is, at roughly a foot square and weighing less than three pounds, DJI's Phantoms and similar devices are perfectly adequate for consumers, and for small businesses that might make use of a flying camera drone as well. The low price tags on many of these consumer-oriented drones, too, are helping to spur demand and promote widespread acceptance.

... isn't always better for business

But here's the thing: The same cheap prices that permit companies like DJI, its Chinese rival Xiaomi, and France's Parrot to win sales among consumers may hurt these companies' ability to market themselves to investors.

According to The Wall Street Journal, consumers spent some $1.7 billion globally on flying camera drones last year, a number that was up 55% year over year. In the U.S., the market grew even faster, with sales doubling in the 12-month period from April 2016 to April 2017. Globally, sales of drones with cameras are expected to surpass $3 billion next year, and to top $4.5 billion by 2020.

China's DJI currently "dominates the consumer market" for camera drones globally, says the Journal. DJI accounts for roughly two out of every three  camera drones sold to consumers, and it's attracted a lot of interest from private investors. Private equity funds are said to have sunk some $10 billion into DJI. But what about retail investors?

What it means for investors like us

You have to figure that eventually, the early stakeholders will want to cash out by IPO'ing DJI (and presumably, other drone makers). But that could be difficult. Citing problems making a profit, No. 8 camera drone producer Yuneec announced in March that it was laying off workers. No. 2 player Parrot, of France, announced in January that it was laying off a third of the workers in its drone division. No. 6 drone company 3D Robotics was recently spotted trying to sell stock to raise funds at a valuation 82% below what it fetched two years ago.

None of this bodes well for investors being enthusiastic if and when these DJI rivals debut on the stock market.

As for DJI, well, whether other drone makers are suffering because it's eating all the profits and starving out its rivals, or whether DJI, too, is suffering from pinched profit margins due to falling camera drone prices, is hard to say. And it will probably remain hard to say unless and until DJI makes an IPO filing with the SEC. It could be that the low prices for camera drones that are delighting consumers and laying DJI's rivals low are the weapon DJI is wielding to monopolize this market -- in which case, a DJI IPO could prove a good opportunity for investors.

We'll just need to see a prospectus to know for sure.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends AeroVironment. The Motley Fool has a disclosure policy.