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  1. Home
  2. / Investing
  3. / Technology

Game of Drones: GoPro and Ambarella Poised to Fly High

The drone business could be a winner going forward.
By JOHN REESE
Nov 25, 2015 | 02:00 PM EST
Stocks quotes in this article: GPRO, AMBA, AMZN

With the holidays upon us, one cannot help thinking about gifts for those near and dear. At the same time, terrorism has become a global concern and is on everyone's minds. And corporations are constantly looking at ways they can gain a competitive edge.

You may be wondering if all these factors might converge. They do -- with a technology that only in the past few years has gained a high public profile: drones. These unmanned aerial vehicles, sometimes called UAVs, are beginning to enter the public discussion in a big way.

The military has been using drones to attack the bad guys for the past several years. IHS Jane's Defense Weekly says that militaries around the world spent $6.4 billion on drones in 2014 and will increase such spending 5.5% annually, with drone spending reaching $10 billion in 2024.

Meanwhile, consumers have been buying drones to play with and, perhaps, spy a bit on the neighbors. The Consumer Electronics Association predicts that, in 20 years, drone flights just within the U.S. could reach one million a day. The Washington Post reports that Americans will buy 700,000 drones this year, up 63% from 2014.

Companies and government are poised to use drones in a big way. Police departments, the border patrol, agriculture, the oil and gas industry, among others, are all using drones today. Amazon (AMZN) made headlines not too long ago when CEO Jeff Bezos said he expected his company to deliver products to customers in the not-too-distant future via drones.

Forbes reports that while the use of drones in the U.S. is still relatively novel, other countries have been using them for years, even decades. Japan's farmers use drones to inspect crops, Canadian police use them for search-and-rescue operations and U.K. photographers use them for commercial photography.

Even the venture capital industry is getting involved. DJI, an aerial robotics company, and Accel, a venture capital firm, have jointly set up SkyFund to fund drones and related technology.

I am unaware of any pure-play, publicly traded drone companies, but if you want to have your investments take off with this hot technology, here are two companies in the drone business you should look at.

GoPro (GPRO), renowned for its mountable and wearable cameras, has announced it will get into the drone business in the first half of 2016. In late October, Wired magazine called a video by GoPro that was shot from a drone "impressive."

An investment strategy I based on the writings of Peter Lynch is also thinking GoPro is a winner. This strategy focuses on the PEG ratio, which is price-to-earnings relative to growth and is a measure of how much an investor is paying for growth. A PEG of up to 1.0 is acceptable and below 0.5 exceptional; GoPro is in this latter category with a PEG of 0.35. Another big plus for the company: it has no debt.

Ambarella (AMBA) makes chips that power GoPro's cameras but, like GoPro, it is moving into the drone market by supplying chips used in these flying devices. Its chips are used with aerial photography and videography, a prime market for drones.

But Ambarella has more in common with GoPro than just selling chips to the camera maker. It, too, is a Lynch-strategy favorite. And like GoPro, Ambarella has a PEG well into most-desired territory (0.44) and zero debt.

For those on your holiday shopping list that have everything, a drone might be a winning gift. For yourself, buying into either of these companies could prove even more of a winner.

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At the time of publication, Reese and his clients were long GoPro. 

TAGS: Investing | U.S. Equity | Technology

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