The consumer drones that you see whizzing around the skies these days are essentially flying robots that do stuff like video things, deliver things, or even race other drones. Robotics investors have taken notice of this and are now looking for ways to get exposure to commercial and consumer drones by investing in drone stocks.

In the past, drones tended to conjure up images of military strike newscasts in third world countries, places far away where war is taking place while we try and struggle through all our first world problems. Nowadays, mention of drones is likely to remind us of our recent picnic in the park, with that nerdy looking guy in the background brandishing a remote and providing that whirring background noise with his new toy. This basically sums up the two important sub-sectors where drones are present: military and consumer/commercial. These are two entirely different segments. One gives you exposure to defense stocks, and the other to new drone technologies.

Military drones have been around for a long time. With developments starting in World War 1, they were used in the Vietnam War and have been used widely ever since then. There is nothing disruptive about this area, and we don’t want exposure to defense stocks at the moment. It’s the consumer/commercial sub-sector where we expect the real growth to come from and which we want to have some investment exposure in. With that said, let’s take a look at a drone ETF that currently stands alone in this space, the Pure Funds Drone Economy Strategy ETF (NYSEARCA:IFLY). (UPDATE 6/24/2018 – A one-page PureFunds splash page says that their ETFs have been terminated and they are suing some entities as a result.)

On their opening page, Pure Funds claims that IFLY is the first ETF focused on the emerging commercial drone market, with drone clients in the agriculture, construction, real estate, energy, media, and government markets. Considering the ETF factsheet says almost 57% exposure is towards military applications, this seems somewhat of an overstatement.

At some point someone who built this ETF had to think “are investors looking for drone exposure really interested in buying a bunch of defense stocks“? Taking a look at the IFLY current composition and weights, we see 8 of 44 holdings are above 2% weight, and they constitute almost 40% of exposure. The top 2 holdings (we covered both in previous articles) are Parrot and Aerovironment with a combined weight of nearly 22%:

Parrot hasn’t been doing so well, losing -48% of its value in the past year. What’s happening there is that DJI is kicking the isht out of them. Aerovironment is largely selling military drones (85% unit share of all U.S. Department of Defense unmanned aircraft) though they are trying to diversify into other things.

The other larger holdings are a mixed bag. Ambarella (NASDAQ:AMBA) we highlighted before as a company that gives us exposure to 4 different disruptive technologies. While GoPro (NASDAQ:GPRO) largely sells video cameras that are often used with drones, they are now entering the drone space with their Karma drone at a $1,099 price point seen below:

Boeing, Thales, BAE Systems and Honeywell are all huge multinationals with aerospace and/or defense interests among a multitude of other divisions. Their exposure to drones will be negligible compared to their whole business (and a large chunk will be military anyway). Here’s a quick glance at the rest of the stocks held in IFLY with broad sectors highlighted:

Defense Conglomerates Aselsan

(IST:ASELS) Airbus

(EPA:AIR) Cobham

(LON:COB) Fuji Heavy Industries

(TYO:7270) Dassault Aviation

(EPA:AM) Intel

(NASDAQ:INTC) Elbit Systems

(NASDAQ:ESLT) Jabil Circuit Inc

(NYSE:JBL) General Dynamics

(NYSE:GD) Meggitt

(LON:MGGT) Hitachi

(TYO:6501) NEC Corp

(TYO:6701) Indra Sistemas

(BME:IDR) Rockwell Collins

(NYSE:COL) Korea Aerospace Industries

(KRX:047810) Sony

(TYO:6758) Kratos Defense & Security Solutions

(NASDAQ:KTOS) United Technologies Corp

(NYSE:UTX) L-3 Communications

(NYSE:LLL) Vestel Elektronik

(IST:VESTL) Leonardo Finmeccanica Spa

(BIT:LDO) Yamaha Motor Co

(TYO:7272) Lockheed Martin

(NYSE:LMT) Other Northrop Grumman

(NYSE:NOC) Invensense

(NYSE:INVN)

Orbital ATK

(NYSE:OA) Trimble Inc

(NASDAQ:TRMB) QinetiQ Group

(LON:QQ) Flir Systems

(NASDAQ:FLIR) Raytheon

(NYSE:RTN) Hexagon AB

(STO:HEXA-B) Rheinmetall

(ETR:RHM) Ixys Corp

(NASDAQ:IXYS) Saab Group

(STO:SAAB-B) NVIDIA

(NASDAQ:NVDA)

Teledyne Technologies

(NYSE:TDY) Qualcomm

(NASDAQ:QCOM) Textron Inc

(NYSE:TXT) TransDigm Group

(NYSE:TDG)

In a best case scenario, 28% of the current fund holdings for IFLY have exposure to consumer/commercial drone companies. DJI, the biggest drone company in the world valued at $10 billion, is not included as it’s still in private ownership. Based on this evidence, IFLY is a defense, aerospace and electronics ETF with a meaningful tilt towards drone technology. With around $11 million in assets, IFLY hasn’t been performing very well over the past year with a +6.83% return vs. the S&P 500 (+14.44%) and the Nasdaq Composite (+20.85%):

Just to be perfectly clear here, we’re not saying Pure Funds is misleading investors. The fact is, at the moment there are very few listed pure play drone stocks out there, and there just aren’t enough to build a diversified ETF on this theme without adding in defense drones.

Rumors about a 2017 IPO of DJI are hitting high-tech blogs, so hopefully retail investors will have a chance to buy into the world’s largest drone company soon. In the meantime, here are the consumer/commercial drone stocks (and a few possible future IPOs) that we’ve covered so far here on Nanalyze (click the company names for the corresponding articles):

Parrot (EPA:PARRO) is a French company with the largest weight in the IFLY ETF, and rightly so. They’ve been around since 1994 and currently have a market cap of $285 million. Parrot is active in 3 divisions: Consumer/Commercial Drones, Automotive and Connected Devices, where Drones generated 63% of revenues in Q4 2016. Drone revenue share is up from 34% in 2014 so they are pure play. On the other hand the company posted losses of $47.7 million and -48% performance over the past year, which is due to high restructuring costs and decreased margins to unload stock. We hope their financials will become more balanced following this recent restructuring of operations.

performance over the past year, which is due to high restructuring costs and decreased margins to unload stock. We hope their financials will become more balanced following this recent restructuring of operations. Delta Drone (EPA:ALDR) is a French company in the enterprise drone space offering a complete drone solution which targets mining, agriculture, and industrial inspection. The company trades on the Euronext Paris exchange with a current market cap of around $29 million. Their 2016 annual report is not published yet, but the stock’s -36% performance in the past year suggests Delta Drone is not in a very good shape.

performance in the past year suggests Delta Drone is not in a very good shape. Ambarella (NASDAQ:AMBA) is a developer of semiconductor processing solutions for video that enable high-definition video capture, sharing and display. Their products are used in GoPro and integrated drone cameras. Ambarella’s performance has been an incredible +778.5% since their October 2012 listing. Current market cap stands at $1.8 billion and annual performance is +23.21% .

since their October 2012 listing. Current market cap stands at $1.8 billion and annual performance is MOTA Group, based in San Jose, California, has filed for an IPO late 2016 but we’re still waiting for it to happen. MOTA has a range of commercial and consumer drones at very economical price points and boasts of 1.7 million units sold worldwide. We see some red flags though – leadership is not backed by any notable venture capitalists and has only two C-level appointees with rather diverse backgrounds.

AgEagle is a manufacturer of agricultural drones which use data to increase crop yields by taking a targeted approach to farming. These guys filed for an IPO that didn’t generate much attention and it appears that they didn’t attract enough interest since the company is still private. It’s notable though that in 2016 they signed a worldwide-exclusive distribution agreement with Raven Industries (NASDAQ:RAVN) under which Raven will private label and purchase their RX-60 drone exclusively for the agriculture markets for resale through their network of dealers worldwide.

Are we missing any drone stocks in the above list? If so, drop us a line and we’ll add them. We’re especially interested in hearing about any drone over-the-counter (OTC) companies so we can warn people not to invest in that garbage. Let’s hope 2017 will bring interesting developments to the market, like maybe a DJI listing.

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