This latest spiel from Casey Extraordinary Technology caught my eye because it includes so many silly enticements… the hint of mystery, the photo of the secret building that a big company never talks about, the connection to unusual world elites (a scale model hand delivered to Pope Francis” and, of course, “a technological breakthrough not even science fiction had imagined.”
So what is it all about? Well, the ad is pitching subscriptions to Extraordinary Technology ($1,500/year), and the “secret” that they’re using to pull you into the ad is really just drones.
Drones aren’t really shocking or secret to most folks anymore, not when half the kids in the neighborhood have little toy “drone” cameras flying around and we all see the stories about increasing military and police dependence on drones for both surveillance and weapons systems… but let’s see what it is that Extraordinary Technology editor Chris Wood is actually recommending as a buy.
His “special report” that comes with your subscription is called “How to Invest in the New ‘Drone Economy,'” and it looks like he’s essentially pitching three drone-related stocks. So what are they?
Well, I’ll skip through most of the looooong lead-in to the specific investment ideas, but let me just give you a little taste of the ad so you can see where Wood is coming from — this is the intro:
“Something extraordinary is being assembled at Facebook Headquarters… and it’s so sensitive… not even Mark Zuckerberg is allowed into the room holding it without prior special permission
“WHAT’S FACEBOOK HIDING IN BUILDING #17…?
“Why was a scale model of it hand delivered to Pope Francis?
“Wall Street knows the answer and so should you!
“Early investors in this revolutionary technology are in a perfect position to see another 1,152% gain in just over 2 years!”
And he spins a tale about Facebook’s big investment in this “secret” project that they run out of “Area 404” … and then the “shocker” ….
“Facebook isn’t the only company building this thing… this device.
“Google is attempting to build it, too.
“As are other tech heavy weights like Intel and Microsoft.
“They’re all building their own versions of it.
“And here’s the real shocker…
“Not one of these companies has any intention, as far as we know, of selling these devices.
“Not to consumers, you and me, not to businesses – not to any one!
“They intend to keep these devices all for themselves….”
So those are, of course, drones — and yes, Facebook is developing them and Google is developing them and pretty much every big company is figuring out how to build or use them to improve their products. Facebook’s is part of their continuing effort to expand internet access to off-grid areas of the world using large solar-powered drones that will act kind of like wireless towers to extend wireless networks, Google is testing drones for similar internet access expansion as well as for more mundane efforts like delivering Chipotle burritos, Apple is using drones to improve its mapping data… you get the idea.
Saying that they’re not intending to sell them is beyond the point — that’s sort of like saying that UPS is designing more efficient trucks and fueling networks and routing software but not intending to sell them to competitors, or that Amazon’s warehouse-management robots are not going to be sold to competitors… all of which is true but not at all surprising. Not all R&D is intended to develop products for sale, much of it is designed to improve existing products or services or internal business processes.
But that’s not the point, really — the point is that Wood thinks we’re on the verge of the next big industrial revolution, fueled by drone technology, and that his ideas for investing in this segment now could end up being as exciting as early buys in Standard Oil or IBM or Microsoft or Intel or Apple or, well, you can pretty much just throw in any other hyper-successful company and say “what if the little guy you’re buying now ends up being the next Apple?”
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And it is undeniably pretty cool — this is a video of a Facebook Aquila drone test flight…
But will it make us any money? Will drones actually “transform the entire American economy?” I’m not sure, but let’s look into the stocks Wood thinks will be the beneficiaries. He quotes a variety of analysts and market researchers who indicate that the drone industry could be worth $27 billion a year, or $100 billion, or $127 billion… presumably that means “revenues”, but at this point those are not much better than made-up numbers, though perhaps they can help to give people some idea of scale.
And it almost goes without saying that drones will not have a material impact on Facebook, Google, Apple or Amazon anytime in the next year or two (and probably quite a bit longer, though one hesitates to do much prognosticating during fast-changing times) … so what are the stocks that are closer to being “pure play” drone investments?
More from the ad:
“DRONES COULD CHANGE OUR WAY OF LIFE… OUR CULTURE, AND OUR SOCIETY!
“For that reason and many others, which I’ll share with you…
“You’d be wise to take positions right now in three drone-related companies I’m currently recommending to Extraordinary Technology readers.
“After all, just imagine the size of the drone market that will open up – and not just for investors – when Amazon begins drone deliveries…
“Or when the U.S. Postal Service delivers your mail by launching drones from the rooftops of its delivery vans (which according to the Wall Street Journal could already be in the works)…
“Or when Mercedes Benz builds those kinds of delivery vans – which it has announced it’s doing…
“Or when America’s largest retailer, Wal-Mart, also enters the drone market.
“In fact, the New York Times reports Wal-Mart is now testing drones at a number of its large warehouses.
“Heck, Domino’s has already started testing drones to deliver pizza!
“Even 7-Eleven is getting into the act.
“In a test run, it recently delivered, via drone, a chicken sandwich, donuts, coffee, candy, and of all things Slurpees to a home in Reno, Nevada.”
And he goes on to talk about using drones for construction inspection, bridge monitoring and other “refurbish America’s infrastructure” tasks… since pretty much every stock has to have a “Trump Infrastructure” pitch to get attention right now.
And just to make sure we don’t miss the point…
“DRONES COULD BE THE BIGGEST INVESTMENT BONANZA SINCE THE INVENTION OF PLANES, TRAINS AND AUTOMOBILES”
But it’s the specific ideas we’re trying to suss out here — so let’s all breathe a sigh of relief that we’re finally at that point…
“Three companies that appear destined to become driving forces within the new drone economy.
“And because all three companies are small caps with valuations well under $3 billion…
1/100th the size of Facebook and Amazon…
“And 1/200th the size of Google…
“The growth they could generate could be infinitely larger than what those tech behemoths could produce.”
And then, finally, our favorite part: The clues!
“THE LARGEST U.S. MANUFACTURER OF COMMERCIAL DRONES
“Therefore, it’s the one company that stands to benefit the most from the drone revolution.
“Plus, it’s the only “pure play” drone manufacturer that’s publicly traded.
“Unlike Boeing, Raytheon and Lockheed Martin who build everything from missiles to jet airliners, and a relatively small number of drones…
“This company is almost exclusively focused on drones.
“It’s also the U.S. military’s largest supplier of “small” drones
“It’s delivered thousands of them!
“It also sells its drones to more than 30 international governments.”
And I’d like to thank Mr. Wood for including even more clues for us…
“The company was actually founded in 1971, and achieved early fame when it built NASA’s human-powered Gossamer Albatross, which flew 23 miles across the English Channel….
“seven of the company’s experimental prototypes have been selected for permanent display at the Smithsonian Museum in Washington, D.C.”
So this is the company that probably most of us would start with if we were researching drones: Aerovironment (AVAV), which has been an up-and-down stock for many years but has certainly had some compelling aeronautical advancements after being founded by the late aero-pioneer Paul MacCready, Jr. in 1971 (he passed away almost ten years ago, around the time Aerovironment went public).
Aerovironment is a long-time “story stock” — they’ve been involved in lots of things that have gotten attention, like their SkyTower (sort of like Facebook’s Aquila, a flying replacement for communication tower infrastructure), and a system they designed to put miniature windmills on skyscrapers, in addition to the drones that have been their core business for many years now — primarily larger drones that are bought by the military for unmanned surveillance and weapons systems.
And yet, over the past decade, they’ve never been able to turn their expertise, or their early-stage leadership in some sectors, into sustained revenue growth or earnings growth. They’ve had spurts of revenue growth, particularly from 2007 into late 2011 when their annual revenue went from about $100 million to a peak of $300 million or so, but there have been big dips as well and the revenue hasn’t really grown at all in the last five years… and, perhaps more dishearteningly, they’ve also not been able to make a profit lately — they were earning somewhere in the $1-1.50 range in profits per share from 2008 through 2012, but that number fell apart when revenue growth disappeared and they have posted a loss of 19 cents over the past four quarters.
The company is not in trouble, at least according to their financial statements — they have almost $200 million in cash and no debt, so they can keep puttering along without making a profit for quite a long time if necessary… and analysts do think that they will start to increase both revenue and earnings again, with an expectation that they will earn about 21 cents next year, 47 cents in 2018, and 70 cents in 2019.
That’s still not all that fantastic, not for a company that five years ago was easily earning a dollar per share in annual profit most of the time, but it’s certainly better than the recent past — and that would mean, once the calendar ticks over and everyone starts thinking about 2018 earnings projections, that AVA is trading at a forward PE of about 60.
Which means that you’d better be right about the notion that they’re leading the drone market and will be a foundational company in this next technology renaissance that builds fortunes… if they don’t get growth percolating a lot faster than it is now, that’s a pretty steep price to pay.
You can make it look a little better if you instead look at the PE “ex cash” — thinking bout how the company would be valued if they got rid of their extra cash in one fell swoop (which gets you, theoretically, closer to what the valuation would be for someone who wanted to buy the whole company today and take it private)… but not a lot better. The cash level amounts to roughly $9 a share, so if you cut that out of the share price you’d actually be paying $19 “ex cash”, so the 2018 PE would come out to 40 (or, if you want to sound fancier, you can say projected 2018 EV/EBITDA is about 18… which is also pretty high and, to me, would mean that investors are assuming a very healthy and sustained growth rate). So those are numbers you can use if you’re trying to convince yourself to buy the stock, but I use them to balance the excitement of the “maybe someday” potential with the reality of the current and near-future income statement.
How about the other two ideas? This is what’s pitched:
“What’s the single most important piece of equipment built into or attached to a drone – be it for commercial or recreational uses?
“The camera, of course.
“Even a drone designed to simply deliver packages would be incomplete and less functional without a camera.
“However, this next company doesn’t actually build cameras for drones…
“It builds the hardware and software that enables cameras to operate flawlessly while in flight.
Specifically, it builds hi-performance image processing and video compression computer chips.”
And this company already has a big market share, apparently:
“DJI, which owns 70% of the consumer/recreational drone market… uses this company’s SoC, as does DJI’s competitors: Yuneec and Xiaomi.
“And for good reason. When it comes to SoC – this company is considered ‘best in breed.’…
“… clients also include: GoPro, Sony, Google, and Apple….”
So who is it? This is almost certainly the video chip maker Ambarella (AMBA), which has been tied at the hip to the most publicized maker of “action cameras,” GoPro, and has ridden that GoPro demand and sentiment up and down over the past year or two. And yes, they’ve been teased for their drone connection before, since certainly small, light and energy efficient camera chips are important for drones whether you’re talking about toys huge weaponized pilot-less planes or the wide variety of products inbetween.
Ambarella was in the news earlier this week because some investment banker was suggesting that they should buy Invensense (INVN), which is a maker of sensor chips (accelerometers, gyroscopes, etc.) primarily in smart phones… which would essentially tie together two companies that are currently struggling to find revenue or profit growth despite the growth in their underlying markets (that’s not just these two companies — that’s the curse many smallish semiconductor companies face… a spurt of innovation and sales of a new product gets you designed into more high-volume products, which brings volume discounts from penny-pinching manufacturers as well as competition from similar designs, which means they almost immediately begin to look down the barrel of a gun at pricing pressure and innovation pressure that threaten the economics of any small chip company whose products have competition. Not that I’m bitter or anything, but it was illustrative to watch this happen to Invensense when they finally “won” and got designed into the iPhone 6… and then headed almost straight downhill because of pricing demands from Apple and Samsung that smushed their margins).
Earnings peaked about year ago and have been trending downward since then until this past quarter — in their October quarter they put together their first revenue growth year over year after three quarters of declines, though it still wasn’t enough to bring profit growth (they earned 84 cents a share in the quarter, versus 87 cents a year ago). Certainly the holiday season will be big, since GoPro and other consumer camera and drone makers are a big part of their revenue, but they do need to get growth re-kindled, whether it’s from drones or whatever else, in order to justify the current valuation — the assumption is still that this year will close out with almost 15% lower earnings than the year before, but analysts are projecting that growth will resume — the current consensus for next year is somewhere between $2.75-2.90, depending on which group of analysts you ask, and the expectation is that continued growth in the high-single-digits will get you up to $2.15-3.20 in earnings per share in 2019.
That’s not super-rapid growth, despite the fact that the stock is trading at almost 20 times 2017 earnings estimates… so it’s not crazy overvalued and it might keep growing if the drone market really takes off in high volume and they don’t get squeezed out by lower-priced competitors, but there’s certainly some risk from both the heavy reliance on niche markets like consumer drones and action cameras and from competition if the drone market gets big enough to drive a lot of competition. But it is also a real “story” stock, so if the notion of drones takes off in the minds of investors there’s a good chance that Ambarella will get more attention — and it is small enough, with a market cap of just under $2 billion, to possibly move based on that kind of attention.
“How does a drone know where it is… how high it is… how fast it’s flying… if it’s level, or upright?
“The answer: miniature sensors….
“… this next recommended company is the first…
“To place optical image stabilization, motion tracking, a gyroscope, an accelerometer, a pressure gauge, and a compass – miniature sensors all – on a single computer chip the size of your thumbnail.
“All of which make drone control and navigation possible.
“But here’s the best part…
“This company’s miniature sensors don’t exist only in drones.
“Its sensors could be found in almost every modern day electronic device you use today.
“For example, its sensors are in Apple and Samsung’s smartphones.”
That sounds exciting, but it’s also worth noting that there are a lot of companies making small sensor chips — and when we’re dealing with chips that are used in smartphones, you’re talking about an extremely competitive and cost-conscious market where capabilities are constantly rising and prices are constantly being driven down because of the market strength of Apple and Samsung and other large manufacturers. That means these chips depend on high volume, so the market impact might not be what you would assume: It could be that drones are a beneficiary of this existence of low-cost sensor ships, since they get cheaper chips as a result of a much higher volume industry that demands similar components, but the drone industry volume is such that drones themselves might not have a big impact on the demand for sensor chips. Make sense?
Anyway, that’s just a thought exercise — remember that the presentation from a newsletter ad doesn’t necessarily look at the market as a whole, they’re typically trying to conjure up daydreams of wealth based on nebulous notions of “getting in on the ground floor” of future growth — they’re not trying to get you to think critically about an investment idea.
So what are some other clues about this sensor company?
“… this company is a leading, if not the leading manufacturer of miniature sensors.
“Of course when you’re a leading manufacturer of anything in widespread demand – profits almost always follow.”
Well, strangely enough, the Thinkolator sez that the best match for this one is Invensense (INVN) — there are other companies who do most of these things in sensors, from STMicroelectronics to Bosch and others, many of which are larger companies, but Invensense claims some “firsts” in these “system on a chip” sensor packages and they do match these clues. So this isn’t a 100% match, but it’s the best one I’ve got for those clues.
And I’m probably a little too jaded about Invensense to take it seriously… but it is a strongly innovative company with solid products, despite their inability to turn that into revenue growth or earnings growth. It is also a takeover target, we’re told — not just because an analyst suggested that Ambarella bid for them, but because TDK reportedly bid $12 a share for the stock last week (that’s what drove the shares up from $8 to $10.50 in a hurry). That’s still just a rumor, based on reporting from Reuters, and my inclination would be to take the money and run if you’re an INVN shareholder… and not to buy the shares based on any possible takeover premium beyond that. But, again, maybe I’m too jaded after the years of margin pressure and earnings disappointments following Invensense’s product “wins” in the last few years.
So that’s what we’ve got in the world of drones for you — any of those stocks sound like exciting plays on the next technological and industrial revolution? I can’t say that I’m champing at the bit to buy any of them, but certainly it looks like drones are here to stay and I’ve often been behind the curve when it comes to recognizing the potential of new markets (way back in the pre-iPhone days I thought cameras in cell phones were a novelty that would never catch on… oops), so if I’m missing something please let me know with a comment below. Thanks for reading!