Whether tracking Russian military positions or delivering a box of golf balls in Jacksonville, Florida, drone technology, also known as unmanned aircraft systems, has come into its own in 2023.
Through the first half of 2023, successful drone deliveries passed 500,000, according to McKinsey, and they were projected to exceed 1 million by the end of this year. Leading retailers Walmart Inc. (ticker: WMT) and Amazon.com Inc. (AMZN) are testing commercial drone deliveries, U.S. government regulators are getting ready to greenlight more drone flights and the technology is proving to be a quick and efficient way for Ukrainian soldiers to gain an edge in the war with Russia.
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Drones are finally having their day, but is their ascent enough to allocate some cash to drones in the stock portion of your investment portfolio? There is a flight path for drone stocks headed into 2024, but due diligence, discipline and a good assessment of downside risk is necessary. Here are a few quality stocks to research:
| Drone stock | YTD return as of Dec. 12 |
| Amazon.com Inc. (AMZN) | 75.6% |
| EHang Holdings Ltd. (EH) | 98.6% |
| Kratos Defense & Security Solutions Inc. (KTOS) | 101.8% |
| AeroVironment Inc. (AVAV) | 46.1% |
| Boeing Co. (BA) | 30.5% |
| Joby Aviation Inc. (JOBY) | 91.3% |
| Northrop Grumman Corp. (NOC) | -10.7% |
Amazon.com Inc. (AMZN)
This digital retail giant has grand plans for drones as a delivery service going forward, as it recently announced it would phase in the six-rotor MK30, its faster, lighter, rain-accommodating drone, by the end of 2024. It plans to push its Prime Air drone delivery operations deeper into the U.S. and expand into the U.K. and Italy. Amazon has already successfully tested its MK27.2 drone (which the new MK30 will replace) in Lockeford, California, and College Station, Texas.
As for Amazon’s stock, what’s not to like? Amazon’s share price is up 75.6% on a year-to-date basis with a blockbuster market capitalization of $1.5 trillion as of Dec. 12. Amazon has wisely used the inflation-driven consumer spending pullback to bulk up its digital commerce, cloud computing, artificial intelligence and online advertising operations.
Amazon’s tech infrastructure should be sharpened and ship-shape for when consumers ramp up their spending in 2024.
EHang Holdings Ltd. (EH)
Flying cars have the potential to change transportation, and finally the industry is starting to attract attention in global financial markets. While still in its infancy, this specialty area is estimated to grow to $1.5 trillion by 2040, up from $255.4 million in 2022, according to Fortune Business Insights. That represents an explosive compound annual growth rate, or CAGR, of 58.1%.
Guangzhou, China-based EHang has already established itself as one of the leading flying-car manufacturers in the world and seems poised to dominate the lucrative Chinese market. The company has already tested 8,800 autonomous aerial vehicles (AAV) in select Chinese cities and is growing fast, with a 248% annual revenue growth rate on a year-to-year basis in the third quarter. While not technically profitable yet, EH’s net loss of $12.7 million in the first quarter showed profit losses narrowed by 21% from the prior quarter.
Big investors include Vanguard and State Street, and the share price is up 98.6% on a year-to-date basis as of Dec. 12. While brand-name competitors such as Boeing Co. (BA) and Airbus SE (OTC: EADSY) operate in the same AAV sector, EHang’s track record in China alone makes it worth a closer look for drone stock investors going into 2024.
Kratos Defense & Security Solutions Inc. (KTOS)
Round Rock, Texas-based Kratos is another highflier in the drone sector, with its share price up 101.8% in 2023. The company, which provides mission-critical unmanned aerial systems products, services and solutions for U.S. military defense and national security companies, saw third-quarter revenues rise by 20% on a year-to-year basis, compared with a 14.5% increase in the second quarter of 2023.
New contracts with the U.S. Navy (for $22.9 million) and the U.S. Space Force’s Space Systems Command (up to $579 million) show that Kratos already has robust connections with the Pentagon. Additionally, the recent Israel-Hamas conflict in the Middle East and the Ukraine-Russia war have boosted military drone stocks, and Kratos is a big beneficiary. Seven market analysts also deem KTOS stock a “strong buy,” according to TipRanks, signaling even more bullish sentiment.
AeroVironment Inc. (AVAV)
It’s no surprise that artificial intelligence is immersing itself in the global drone sector, and AeroVironment’s recent $120 million acquisition of Tomahawk Robotics, an industry leader in the AI-based unmanned vehicle sector, indicates AVAV is enthusiastically on board.
The company noted a 62% rise in sales for the second quarter, along with a higher revenue outlook of between 27% and 30% for 2024. Two key industry analysts, Robert W. Baird and Jefferies, have $150 price targets on the stock (it closed at $125.13 per share on Dec. 12).
More robust AI-based unmanned systems controls will boost drone performance and contribute to revenue growth going forward, the company has stated. Simultaneously, the Israel-Hamas military conflict should boost AVAV’s share price, which rose 13% in the weeks after the fighting started.
Boeing Co. (BA)
While Boeing does have a 30.5% year-to-date gain in 2023, easily besting the S&P 500’s 20.9% rise as of Dec. 12, the Arlington, Virginia-based aviation giant hasn’t had an easy go of it this year. Ongoing supply chain issues and fluctuations in top management posts have been problematic, but industry analysts still seem bullish on Boeing’s prospects for 2024.
Citing 2023 as a “transition year” in a recent research note, Seaport Research Partners analyst Richard Safran said those supply chain headaches “should abate in the second half of 2024,” which should boost the production numbers on Boeing’s 737 MAX airplane.
Safran, who hiked his BA target price from $246 to $287 and maintained his “buy” rating on the stock, says cash flow should improve from an estimated $3 billion to $5 billion in 2023 to $11 billion in 2026.
He’s not alone. RBC Capital recently upped its call on BA from “sector perform” to “outperform” in November, while Deutsche Bank moved from “neutral” to “buy” in the same period. Analysts cite production gains in the commercial and defense sectors as big growth drivers in 2024.
Joby Aviation Inc. (JOBY)
Joby is an emerging name in the electric vertical takeoff and landing aircraft (eVTOL) space that promises to provide air taxi services to urban areas. Recently, New York City onlookers were treated to a highly visible test flight on Nov. 13, with an eVTOL circling lower Manhattan. It was the first-ever flying taxi sighting in New York, and it won’t be the last if Joby gets its way.
The Santa Cruz, California-based company has already delivered an eVTOL to the U.S. Air Force and is well into stage 3 of its Federal Aviation Administration design assessment testing phase. Once it clears the FAA’s stage 4 (performance) and stage 5 (administration), Joby’s fleet of flying vehicles should be ready for liftoff in what promises to be a volatile and potentially highly profitable segment of the aviation industry.
The market prospects for so-called flying cars look promising, a good sign for early-arrival companies like Joby. Morgan Stanley has estimated that the aerial vehicle market could exceed $1 trillion by 2040 and expand exponentially after that.
Northrop Grumman Corp. (NOC)
Northrop Grumman is lagging behind its aviation industry peers, with its share price down 10.7% against the Dow Jones U.S. Select Aerospace & Defense Index’s 10.5% gain year to date as of Dec. 12.
The aerospace and defense company is seeing some signs of life from sector analysts, who believe Northrop is in prime position as the U.S. government engages in some heavy-duty saber rattling overseas in Ukraine and in the Middle East, which historically has portended well for military defense companies.
Trading at $479.25 as of the Dec. 12 close, Northrop could climb to $615 per share, according to Bank of America Securities’ Ronald Epstein.
The defense giant’s most recent quarterly earnings report looked equally promising, with sales rising 9% on a year-to-year basis to $9.8 billion, and its operating income rising 20.4% over the same time frame to over $1 billion. Meanwhile, Northrop raised its 2023 sales guidance by $400 million to $39 billion.
The company also has a decent dividend story, with a current forward yield of 1.6%.
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7 Best Drone Stocks to Buy Now originally appeared on usnews.com
Update 12/13/23: This story was published at an earlier date and has been updated with new information.
