Widespread commercial drone delivery got one step closer to becoming reality this week. For better or worse, the future is up in the air.
It's the first step toward routing consumer packages throughout the United States.
For some, the idea of electric drones buzzing overhead is downright dystopian. Science fiction teaches us that these eyes in the sky are the foundation of the surveillance culture. They can follow us everywhere we go and there is nothing we can do about it. Business leaders cite cost efficiencies.
Jeff Bezos, chief executive officer at Amazon.com (AMZN) - Get Report , began talking about drones in 2013. Amazon Prime Air, a separate subsidiary, started working with NASA to develop an air traffic management system. The big idea was to fly next generation drones at low altitudes, 400 feet or less, in locations that that were not accessible by road or fixed routes.
The FAA granted the Seattle e-commerce giant permission in 2015 to begin testing a prototype. And the company even patented a large beehive-like depot in 2017, to house, charge and dispatch the robot package carriers. The wild idea of flying parcels seemed imminent.
However, Amazon has never been able to push its concept across the finish line with regulators.
This week, United Parcel Services executives got there. The agreement with the FAA is the first of its kind, setting the stage for the Atlanta-based logistics company to set up unlimited fleets of drones and pilots on the ground, according to the WSJ.
Its Flight Forward subsidiary will begin with the shipment of medical supplies and specimens across various campuses in North Carolina. However, David Abney, chief executive, says the operation will grow to 100 or more hospital complexes within months.
As the expansion unfolds, managers expect drone delivery for UPS packages will become a reality for rural communities that are difficult to service conventionally.
The play for investors is less direct. UPS is a giant company and drone delivery will play a very small role in future sales and earnings. And while being the first mover is an advantage, it's going to take some time for this to be reflected in the share price.
In the interim, the best way to invest the development of commercial drones is the companies providing the components.
Heico Corp. (HCI) - Get Report in September 2017, acquired AeroAntenna Technology, a private company that makes high performance active antenna systems for the defense industry and commercial aircraft. The press release noted the deal was the largest ever for the niche market aerospace contractor.
But managers at the Florida firm saw a big new market on the radar. The company has been a consistent grower because managers has always been two steps ahead of competitors when moving into new markets. AeroAntenna allows Heico to become an instant player in drone subsystems.
The company is growing annual sales in the middle teens. Revenues reached $1.8 billion in 2018, up 16.6% year over year. At the same time, managers have maintained gross margins of 40%, and operating margins above 20%.
The story is similar to what is transpiring in Sony's (SNE) - Get Report image sensor business. Today, the Japanese consumer electronics company has 50% market share in the sensors found in cameras, smartphones and commercial drones. Its scale, substantial intellectual property portfolio and best-in-class devices limit competition.
It's simply more cost-effective for companies to buy the sensors from Sony than build custom units.
All of this is coming at an opportune time. As commercial drones move from testing to reality, a new market for the sensors that make machines smart will take shape.
An important piece of the future of logistics is up in the air. It's time for investors to begin taking stakes.
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To learn more about Jon Markman's recommendations at the crossroads of culture and technology, check out his daily investment newsletter Strategic Advantage. To learn about Markman's practical research in the short-term timing of market indexes and commodities, check out his daily newsletter Invariant Futures.
The author of this column owns shares in Amazon.com.