Market Analysis

Drones, Pizza and a Reality Check

The FAA's approval of commercial drone flights excited investors, but with key rules still unwritten, patience seems paramount.

Editors' Note: MarketMinder does not recommend individual securities. The below simply represent a broader theme we wish to highlight.

The moment Americans have been waiting for is here! Sort of. On Monday, the FAA sort of approved commercial drone flights, sort of paving the way for drone use to spread from hobbyists to businesses, which could use them to boost productivity and output in super cool ways. However, there are some hurdles along drones' road from glorified remote-control airplanes to totally awesome world-changing productivity enhancers. The rules don't allow drones to fly at night, over people or out of visual contact with the operator. The FAA is working on these, but there is no ETA. Meanwhile, the Internet is abuzz with hot tips on how investors can cash in on the presumed drone bonanza, and we think a word of caution is in order: Most of the enthusiasm centers on drone manufacturers, but often, when new technologies emerge, the real winners aren't the creators or producers. Many times, the best investment opportunities lie with the firms that use the new technology to boost their own services or productivity. Those drone-related opportunities will become apparent over time, as they did with the Internet and 3D Printing, but with critical regulations still unwritten, trying to pinpoint the winners now is sheer guesswork.

Getting in on a hot technology is always tempting, but it isn't for the faint of heart. When new technologies emerge, most of the developers tend to be microcap firms or privately held, as is the case in the drone world right now, limiting investment options and forcing eager investors to compete for a very limited number of shares. Markets discount widely known information, including opinions and fantastical forecasts. Enthusiasm and potential get priced early. To reward investors over time, companies will have to meet sky-high expectations. Some might. Others might stumble badly and endure a lengthy, painful turnaround before eventually rewarding patience. Some might just plod along. And some might fail. Who will stand? Who will fall? Ask anyone choosing between Texas Instruments and Transitron in 1959, and they'll tell you how difficult it is. Both were can't-miss semiconductor and transistor plays. The hardware still plays a huge role in computing and electronics, and Texas Instruments remains an industry giant. But Transitron was worthless within a few years. That doesn't mean all early opportunities will go the way of Transitron, Global Crossing or even Prodigy, CompuServe, Iomega and Netscape. But successful long-term investing isn't about chasing the next big thing in hopes of quick riches. It's about managing risk, diversifying and thinking long-term.

When it comes to new technologies, we think investors are better off considering which firms and industries will enhance their businesses by adopting that new gadget or gizmo. As any chart comparing Amazon and AOL since the late 1990s will tell you, the biggest success stories often aren't the technology or service providers, but the firms that use the new technology to revolutionize their business. Now, there is a lot drones could potentially do one day. We long for the day when a bot could pop through a cat flap in our wall and drop a hot pizza on our desk! But because regulations aren't complete yet, there is a lot drones can't do in America today, and we have no way of knowing if they'll ever be able to. Deliver take-out, groceries and packages. Act as mobile wifi hotspots. Buzz around our houses and apartments and beam us live video feeds so we can watch for intruders. Tail our kids when they're walking or biking to school to keep those strangers with candy at bay. Plus a lot of stuff that we won't write here, lest you think we're mad science fiction geeks. But to do it, they'd need to be able to fly over people. Occasionally at night. And beyond the pilot/operator's line of sight.

While the FAA is working on those guidelines, regulators have a long history of moving glacially, writing in unintended consequences and otherwise hampering technological progress. While most expect the FAA to release a draft of rules permitting flight over people by year-end, the beyond-line-of-sight issue and night flights will likely take longer to address. As the US's relatively late arrival to the drone party shows (Pizzabot goes live in New Zealand in October), there is a lot of risk aversion among regulators and politicians. Trying to handicap how any regulatory agency will write any set of rules is a fool's errand, but given the US's painstaking approach and the fact that an administration change looms, that probably goes extra where drones are concerned.

Until the FAA finishes its homework, the opportunities are limited. Some firms might soon use drones for warehouse security and inventory monitoring, which is kinda cool and might help reduce costs. But we're a ways off from the exciting, revenue-generating potential for most US businesses. One day it will hopefully come, and with it, really cool investment opportunities! But for now, we think patience is key.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.