The best way to invest in drones is by shorting GoPro (NASDAQ:GPRO). Then invest in a drone company with real upside potential, such as Drone Aviation Corp. (OTC:DRNE) or your own selection. This type of pair trade gives you the upside potential of an undervalued drone company with the downside potential of one of Wall Street's most irrationally expensive stocks.
Step 1: Short GoPro (GPRO)
With a staggering forward P/E of 63, GoPro is an expensive Wall Street fad. GoPro already fetches the median share target price of experienced analysts, and the most deliriously optimistic price target for GoPro is only 34% higher than its current share price (as compared to most blue chip alternatives with triple-digit potential).
GoPro has a market cap of $10 billion yet will generate just $1 billion in gross sales- not including costs or taxes. After you back out all of its costs, GoPro is valued at 227 times earnings. In short, GoPro is overbought, reflected below in the uninspiring analyst opinions of GoPro.
- Piper Jaffray at Neutral on October 8th.
- Barclays at Equalweight on October 7th.
- JP Morgan at Neutral on October 7th.
- Citigroup at Neutral on September 30th.
Worse, GoPro recently started pursuing the highly regulated and competitive consumer drone market with sales planned for "late next year" according to the Wall Street Journal. In the meantime, I thought to myself, Kickstarter is launching hundreds of new drone products and dozens of independent producers like California's DIY Drones and China's SZ DJI Technology are already selling millions of dollars of consumer drones.
In fact, GoPro's battle could already be over. The Wall Street Journal argues that GoPro's entrance into consumer drones "might be hedging against a business it could be losing; the world’s biggest consumer-drone maker, SZ DJI Technology Co. of China, recently started selling devices that come with its own in-house cameras." This underscores the fact that GoPro really has nothing proprietary aside from its brand name. Camera and drone quality are improving at an exponential rate. I believe consumers' temporary loyalty to GoPro's brand will expire just as fast as their loyalty expired for Walkman, Zune, Tomagatchi, GameBoy, and countless fad products. History repeats itself.
Step 2: Buy a Stock with Actual Upside Potential
After shorting the most overbought drone stock, GoPro, consider a value investment in a stock with upside potential like Drone Aviation (DRNE). This enterprise strategy of Drone Aviation is a stark contrast to GoPro's kamikaze drone strategy. Selling mostly to government customers, Drone Aviation builds industrial quality drones for police, forest rangers, military units and surveillance operations. It also focuses on tethered drones that are physically connected to a truck with a cable, thus avoiding all free-flying regulations from the FAA as well as the laughably short battery lifespan (10 minute flying spurts, anyone?). Drone Aviation's drones can carry heavy equipment for days and support cameras with resolutions that dwarf any GoPro camera.
Drone Aviation also avoids the litigious and occasionally life-threatening untethered drone sector that has proven how inexperienced consumers can fly their drones into... the engines of passenger planes.
- "Near-Collisions Between Drones, Airliners Surge" -FAA
- "Drone Flying Dangerously Close to Plane" -Virgin America
- "Quadcopter Flown 'Deliberately' at Passenger Plane" -AP
- "Drone Seen Flying in Path of Landing Planes at Vancouver Airport" -CBC Canada
Whereas GoPro shareholders will have to deal with the catastrophic impact of one of its drones causing a death, Drone Aviation sells only to qualified, industrial operators. A revealing interview with Drone Aviation's COO on this topic can be found here.
Overall, Drone Aviation is a pure play on drones without the dilution of other operations such as GoPro's camera and social media divisions. A low float stock that is undervalued on a peer basis, Drone Aviation also has a billionaire investor who was a Director of Northrop Grumman for 13 years. In terms of revenue, the company's biggest customer is none other than the US Department of Defense. Its second biggest customer is the State Department of Transportation.
Several months ago, Drone Aviation was attracting short-term investor interest due to coverage from Bloomberg, Discovery Channel, Street Authority and Fox, in addition to city, state and military press outlets. Fortunately for me, the attention of that press faded. Now that Drone Aviation's stock has returned its pre-speculation price, it is again a bargain. I am investing in Drone Aviation for triple-digit gains from today's price within 2015.