Here’s what caught our readers’ attention in a pitch from Bill Patalon’s Private Briefing:
“Early investors could reap as much as $115,900 beginning April 21
“In the barren, hostile plains of the New Mexico desert, not far from the Mexican border, they’re building a city like no other.
“A city with high rises, avenues, parks, a big-box store, churches, gas stations for a population of 35,000 at a ground-up cost exceeding $1 billion…
“Made to look like so many other cities in America, except for one thing:
“People – there are none. It’s a ghost town, and it always will be.”
That’s a reference to the Center for Innovation Testing and Evaluation (CITE), which is indeed a “ghost town” being planned by private investors in New Mexico, designed for testing lots of hot-topic stuff like smart city technology, drones, and self-driving cars in an environment where people won’t get in the way or be hurt by accident. It probably will end up costing a billion dollars, they say, though I don’t know what the status is right now — you can see an interesting story about it from Wired here, and the actual CITE website is here but doesn’t have much recent information. The most recent notes I’ve seen are that the actual site was finally chosen in 2014 after a couple years of delay, but I haven’t seen any indication that they’ve actually broken ground or gotten beyond the initial planning phase.
But that’s just the attention-grabber part of the ad — with Patalon using the proximity to White Sands and the ghost town that was built on that missile range to test the impact of the atom bomb on structures and people to imply that this “ghost town” signifies something of equal importance. The pitch really has nothing to do with this “ghost town” specifically, but Bill Patalon is pitching some sort of investment in drones by arguing that a billion-dollar investment in building this “ghost city” indicates that the opportunity for the technologies this city is designed to test will be huge.
The “investor briefing” they promise to provide you is called, “A.I. Drones: How to Pocket $115,900 from the Next Frontier In Flight.”
And the ad goes into most of the big arguments about drones that we’ve been seeing for years — that they will boom in popularity as the technology improves and drops in cost, and as the FAA regulations adjust to clarify rules for drones, because the obvious and easy uses are so abundant… police surveillance, agricultural monitoring, package delivery, you name it.
And, of course, the big and obvious market where costs don’t matter as much is defense, where drones really started — first as remote-controlled targets almost 100 years ago and later as unmanned spy planes on a relatively small scale in lots of US and Israeli engagements, from the Vietnam War to the Yom Kippur War and the first Gulf War, though the first big modern drone program that most folks will recognize is probably the General Atomics Predator that started flying in the early 1990s and was soon weaponized with the addition of missiles.
Patalon argues that we’re at an important inflection point:
“We’ve come to what I call the ‘smartphone moment’ in drones. When BOOM!
“Suddenly the A.I. technology is so capable that drones are being used in a thousand new ways. Even their detractors will be blown away by what these next-gen drones are capable of…
“And how valuable they’ll be.
“Amazing new design and engineering make these new A.I Drones easy to handle, quiet, easily chargeable, super-affordable, operable 24/7/365….
“And here’s the real game-changer: These A.I. Drones are autonomous, which means they can do a number of things you want without you telling them to.”
Patalon indicates that the new FAA regulations for drones, which went into effect last August, allow for a “Section 107.200 Certificate of Waiver” that will allow companies to apply for waivers to fly drones beyond “line of sight”, which he said is a game-changer. I have no idea what the impact of those regulations will be, how tight the FAA will be with waivers, or whether we’ll soon see thousands of “smart” drones flying around without nearby human pilots.
And, of course, Patalon indicates that these “107 waivers” will lead to a cash windfall, and that, you guessed it, there’s “one tiny company” at the heart of it all. So what are our clues about that company? Here’s more from the ad:
“I’ve uncovered one tiny company sitting the center of it all.
“While almost no one in America knows its name right now, I can pretty much guarantee it will be a household name by this time next year.
“It’s already a publicly traded company….Are you getting our free Daily Update
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“This Will Be Like Investing in the Smartphone in 2009….
“Looking at the ‘Apple’ of the drone stocks because they’ve got the coolest new A.I. technology that companies want the most….”
That doesn’t narrow it down all that much, though … how about some more clues?
“… it is the Pentagon’s largest supplier of small drones, and 19 countries buy from it, as well.
“The military A.I. Drones pioneered by this company follow in the footsteps of the greatest technology ever created.
“… if you could own one drone company, this is the one – with its paradigm shifting A.I. technology and potential 4,636% gains over the next three years, making today’s investors tomorrow’s millionaires.”
We need to digress from the clues for a moment, because Patalon then throws in one of those references to “simple math” making the case for massive growth look obvious. Here’s how he puts it:
“As for this 4,636% growth figure – it’s straightforward math.
“While nobody can predict the future, today’s drone industry is posting about $2.3 billion in sales…
“And it’s targeted to soon hit $127 billion in revenues…
“Which also translates into 182% annual compounded growth.
“So if this A.I. Drone company simply keeps growing right along with the industry, it will leap from $233 million to $15.1 billion in sales…Taking its stock price from $23 a share today to $1,118 a share within three years…
“Which means a $2,500 investment, made today, becomes $115,900 for you…”
If you look at that and don’t immediately spit out your drink and laugh, you probably shouldn’t be investing in individual stocks. Even if PricewaterhouseCoopers is right about drones going from a $2 billion market in 2016 to a $127 billion market by 2020, which is swallowing a huge amount of optimism, that does not mean that the individual stocks are going to grow by that amount. Newsletters use that kind of argument all the time — “if company X is 5% of the market now, then they’ll be 5% of a much larger market in five years and you’ll be rich!” It sounds nice and logical, but that’s not often how things really evolve… and, of course, relying on a top-line made-up forecast from a consulting firm that’s trying to sell its services to companies that might use drones is a poor starting point.
But anyway, what other clues do we get?
“Shares of This One Tiny A.I. Drone Company Are Set to Skyrocket
“For the past few years, every drone company was basically ‘on hold,’ waiting for the FAA to make their ruling…
“Now with the 107 Waiver, the long wait is over.
“Dozens of drone companies are already battling to be the top gun in the market.
“The key is to have the best new generation A.I. Drone and to be out first.
“Which is why this tiny drone company I’ve been telling you about is looking at the ride of a lifetime!”
Yeeha! OK, what is this “revolutionary new drone” they’ve developed?
“It’s set for release this spring – and it’s unlike anything ever witnessed before.
“It weighs only five pounds…
“Yet it boasts a body like an airplane, rotors like a helicopter, and takes off like a rocket.
“This little workhorse is so fast it can outrun a car and cover 40 full miles without recharging….
“… it’s carrying what are called “multispectral sensors” and a camera array that can scan and survey hundreds of acres of land at a time, gathering reams of data in the process.
“It then uses Artificial Intelligence and big data algorithms to decipher all of this information for the user….
“…. this company has 94 patents for their technologies….”
And finally, some hints about their military work:
“Predators cost $6 million and Reapers go for $15 million – making for expensive and often messy kills.
“Which is why the Pentagon is turning to smaller, less expensive A.I. Drones from our company. The latest two contracts from the Pentagon were for $18.5 and $47 million. If you have the sense these orders are adding up, you’re right!
“Support for these smaller drone purchases comes from the top, importantly.
“Former Defense Secretary Ashton Carter flight-tested the company’s little 4.2-pound hand-launched drone himself recently at the Naval War College.
“He put the drone through its paces. His conclusion: ‘I like this little guy.'”
So who is this? Well, it’s the company that probably comes first to mind when most investors think about drones: Aerovironment (AVAV), which has often been pitched as a drone “story stock” over the years, mostly because of their long-established position as a major provider of small drones to the military.
And yes, Defense Secretary Ashton Carter did comment positively about Aerovironment’s Blackwing, which is a “micro-UAV” (about 20 inches long) designed to be launched from submarines, that’s a relatively new program that’s being commercialized just now.
Aerovironment’s revenue comes overwhelmingly from defense contracts, almost entirely for the small hand-launched reconnaissance and weaponized drones carried by US forces in the field — they do have other businesses, including some vehicle charging technology that’s apparently getting good orders for electric car chargers, but military drones are 90% of their revenue… and that’s a problem when orders fall, as happened in recent years (even though we’re not really fully “pulled out” of Iraq, we do have many fewer people there who need many fewer drones than they may have three or five or ten years ago). Over the past ten years annual revenue at Aerovironment has mostly been between $150-300 million, peaking in 2011 at just over $325 million, and right now the trailing revenue is just about $240 million.
So this is a company with a pretty strong niche business with the military, and they are clearly trying to build on that both by continuing to innovate for their defense customers in the US and abroad and by expanding their commercial drone offerings (including AI and data processing capabilities, particularly for agricultural monitoring)… but I don’t know whether they will succeed or not. They’re presumably being pinched both by innovation coming up from below, with the hobbyist drone technologies being upgraded every day, including by big guys like Alphabet and Amazon as they consider commercial applications (both do lots of their own R&D, as you’ve noticed — neither of those companies typically are very interested in being hostage to an off-the-shelf, high margin product like they’d get from Aerovironment), and by continued innovation by their major US and Israeli competitors in the military space who would like a piece of Aerovironment’s market in hand-held or tube-launched surveillance and weapon drones. There are even, as if things weren’t bad enough, plenty of instances of terrorist groups using drones — including some weaponized drones from ISIS that are apparently little more than a grenade strapped to a hobbyist quadcopter.
What does that mean about the future for Aerovironment? I have no idea — it would surely make sense that they should benefit if there is a massive new surge of spending on drones in general, but I don’t know that it’s guaranteed that they’d get “their share” of any new spending, particularly because most of their revenue comes from a relatively narrow range of defense products. Their record is not one of consistent revenue growth, so they do seem to be somewhat captive to the waxing and waning demand for infantry drones by the military — perhaps if Trump’s ambitious plans to increase military spending end up bringing new investment in the smaller drone programs where Aerovironment has a good market position that would help them, but we’re probably a long way from really understanding what that will mean for their revenues in 2020. And, of course, we don’t know whether they’ll be successful with their new focus on agricultural monitoring drones… or whether they might be acquired by a big defense contractor, as Patalon also hints at as a possibility.
So you can make your own call. I can tell you that there is some analyst coverage of Aerovironment, as befits a pretty established small-cap defense contractor (their market cap is about $600 million, right around the midrange of where it’s been for a decade) — and those analysts see growth in both revenues and earnings, but, of course, nothing like the 1,000%+ expectations that Patalon tantalizes us with. The analysts guess that AVAV will earn about 20 cents a share in the current fiscal year (ending April) on $260 million in revenue, rising to 50 cents on $286 million in revenue in the following year and 70 cents on $318 million in revenue in the year ended April 2019. At $27, that means, you’re paying about 50X next year’s earnings for the shares — those forecasted numbers are probably not terribly accurate (analysts aren’t so great at guessing at AVAV’s earnings each quarter), but I’m sure they’re more informed than any guesses I could come up with in a morning’s work. The note of optimism I’d insert is that yes, they do have a long-term presence in a growing market, and they do have a lot of cash (about $9 per share) and no debt, so if you back out the cash and think of it as a $18 stock, the numbers look a little better… and, as with many cash-rich and relatively stable companies, there would be some pretty obvious financial engineering someone probably could do if they wanted to take the company over, leverage it up with some debt on the balance sheet, and put some of that cash to use with dividends or something. Or, of course, they could use their cash to make some kind of acquisition of their own, smart or otherwise… you never know.
And with that, I’ll pass it over to you, dear readers — what do you think? Let us know with a comment below.
Disclosure: I own shares of both Alphabet and Amazon, mentioned above. I do not have any other investments in companies mentioned above, and will not trade in any covered stock for at least three days after publication.