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The ongoing tension on the global political stage has reignited talks about the importance of strengthening defense capabilities among nations. While combat armaments and equipment can be incredibly diverse, none have been as sought after as drones.
The civilian uses of drones have seen major growth, especially in the delivery industry, which has been the primary driver for the drone industry as a whole.
Drones and other autonomous aerial vessels have seen a steady increase in demand over the past few years. Drone manufacturers, some of which are already well-established and diversified defense contractors, have been rising to meet the demand and bolster their production output year-on-year.
This article will look at 5 of the most interesting stocks in the civilian and military drone markets to keep an eye on in 2023.
The use of drones and their future applications have been a topic of discussion for years. While civilian uses are typically viewed in a positive light, the same cannot be said for their military counterparts. However, drones are here to stay, and it is important to take a critical view of the civilian and military drone markets, look at the key players, and discuss possible future developments.
The article will discuss the two markets mentioned above, compare the financial and stock performance of 5 key players and overview interesting future projects.
The global drone market is estimated to be worth over $30.6 billion in 2022 and is expected to grow steadily throughout this decade. The market is expected to reach a valuation of $55.8 billion by 2030, with an annual growth rate of 8.3%.
This growth is driven by delivery and miscellaneous media industries - with technological breakthroughs and improved mobility increasing commercial and recreational uses.
European, North American, and Asian markets are poised to drive the bulk of the demand for drones in the near future.
The global military drone market is valued at $11.7 billion as of 2022 and is poised to reach $30.9 billion by 2029. The bulk of this growth comes from some of the largest military powers in the world, such as China, India, and Saudi Arabia which are all increasing their spending on UAVs, while also increasing their overall defense budgets.
The Northrop Grumman Corporation operates as a global aerospace and defense company. The corporation manufactures a broad range of military systems including, but not limited to
NOC is one of the largest defense contractors of the US Department of Defense and one of the most renowned defense companies in the world with over 90,000 employees. Northrop Grumman was founded in 1939 and is headquartered in West Falls Church, Virginia, United States.
Northrop Grumman has enjoyed massive growth since the start of 2022, which is in stark contrast to most other major corporations across different industries. The ongoing war between russia and Ukraine, major supply chain disruptions, and high inflation around the world have exerted downward pressure on stock markets. However, Northrop Grumman’s stock is up from $385 at the start of the year to $520 as of this writing. This is not an isolated case for NOC, as major defense contractors have had a massive year so far.
The ongoing war has triggered important discussions among governments about the importance of adequate defense capabilities - with governments increasing their defense budgets by billions of dollars, which increased demand for the products and services of NOC.
The 1.33% dividend yield is also seen as an attractive alternative in the uncertain market conditions of 2022. Many analysts are bullish on the stock - advising that it is a good buy on any possible discount.
|Q3 FY2022||Q2 FY2022||Q3 FY2021||Full FY2021|
|Revenue||$8,971 mln||$8,801 mln||$8,720 mln||$35,667 mln|
|Cost of revenue||$7,153 mln||$6,842 mln||$6,786 mln||$28,399 mln|
|Operating expense||$972 mln||$1,005 mln||$891 mln||$3,597 mln|
|Net income||$915 mln||$946 mln||$1,063 mln||$7,005 mln|
|Assets||$42,733 mln||$41,914 mln||$42,346 mln||$42,579 mln|
|Liabilities||$28,790 mln||$28,263 mln||$30,929 mln||$29,653 mln|
|Equity||$13,943 mln||$13,651 mln||$11,417 mln||$12,926 mln|
|Cash & cash equivalents||$1,666 mln||$1,169 mln||$4,055 mln||$3,530 mln|
|Free cash flow||$1,039 mln||($460 mln)||$916 mln||$2,152 mln|
Northrop Grumman is one of the largest defense companies in the world with a well-diversified portfolio of military hardware and weapon systems. Still, the company specializes in aerial combat vehicles and systems, which represent an average of over 35% of company revenues.
NOC is a mature corporation with little revenue growth to be expected while being consistently profitable quarter-on-quarter.
The company has a solid balance sheet with decent cash reserves, even though its cash position was dwindling in FY2022 due to increasing production to meet the high demand caused by increasing defense spending among world governments.
Supply chain issues have caused the cost of revenues to increase for Northrop Grumman, but the company maintains solid profit margins and EPS throughput in 2022.
Northrop Grumman is actively working on the development of its next-generation UAS, which incorporates Open Mission Systems (OMS) to allow the system to easily exchange information through the company’s DA/RC architecture.
The company is also working on the Skyborg program for real-time mission management and is aiming to provide low-cost solutions for unmanned aerial vehicles.
Space is one of the fastest-growing segments for Northrop Grumman, which saw an 18% growth in Q3 2022 alone. Space defense systems represent one of the largest growth areas for NOC, which is expected to grow further going into 2023.
"We [!at!] absolutely are staying on the forefront of advanced computing, artificial intelligence, even quantum. And as we think about those advancements in technology, we figure out how do we apply them then to the mission of our customers." - Kathy Warden
AeroVironment Inc designs, develops and manufactures robotic systems and software solutions for governments and businesses in the US and internationally. The company develops and sells products and services, such as
The company supplies HAPS, UAS, and TMS to the US Department of Defense and allied governments. The company was incorporated in 1971 and is headquartered in Arlington, Virginia, United States.
Another defense contractor whose stock rose considerably in 2022 was AeroVironment. The company specializes in unmanned aerial vehicles and systems for military application, which was the key reason for the stock's success in 2022.
The ongoing war and a generally uncertain political climate, as well as the growing importance of drones in modern aerial military operations, increased demand for AVAV’s stock.
However, the company is still way behind other large contractors with multi-billion dollar assembly lines. This also gives AeroVironment greater flexibility to address the needs of the contemporary defense market.
The stock has risen from the $50-55 range to $90. The bulk of this rise came just after the Russian invasion of Ukraine started in February, which prompted investors to pour capital into defense stocks. Improved financial performance has also aided the company in maintaining positive momentum from the start of the year. AeroVironment has also managed to weather the damage done by the 2022 bear market, which did not treat unprofitable, growth-oriented stocks favorably.
|Q1 FY2023||Q4 FY2022||Q1 FY2022||Full FY2022|
|Revenue||$108.5 mln||$132.6 mln||$101 mln||$445.7 mln|
|Cost of revenue||$74.8 mln||$84 mln||$72.3 mln||$304.5 mln|
|Operating expense||$37 mln||$35.6 mln||$40.8 mln||$151.1 mln|
|Net income||($8.4 mln)||$7.3 mln||($14 mln)||($4.2 mln)|
|Assets||$896.7 mln||$914.2 mln||$908.6 mln||$914.2mln|
|Liabilities||$296.5 mln||$306 mln||$310.3 mln||$306 mln|
|Equity||$600.2 mln||$608.2 mln||$598.3 mln||$608.2 mln|
|Cash & cash equivalents||$102 mln||$180.7 mln||$93.9 mln||$102 mln|
|Free cash flow||$10.5 mln||$8.3 mln||($20.7 mln)||($31.9 mln)|
AVAV’s financials show a slow and steady course toward profitability. While revenue growth is not too noteworthy, Q1 of FY2023 revenue has still increased YoY.
The company has a relatively modest cash position compared to its total assets, however, this can be attributed to unprofitability hampering AVAV’s ability to generate some much-needed cash.
Long-term investors may be relieved by the modest number of outstanding liabilities on AeroVironment’s balance sheet, which gives the company the ability to secure loans in the event of a cash crunch.
Despite being unprofitable, analysts are cautiously bullish on the stock in the long run, as there is plenty of growth potential in the military drone market.
"[!aerovironment!] Quantix drone is purpose-built; you just have to push a button, it'll take off on its own, it'll transition to a forward flight, it'll plan its own mission, it will scan you entire field with multiple sensors, it'll land back to exactly where it took off from vertically and that's all done with a push of a single button" - Wahid Nawabi
AeroVironment was awarded an $8 million contract by the US Army to develop 6 units of tactical unmanned aerial vehicles.
AVAV is actively working on solving some of its supply chain bottlenecks, which are causing the company to miss out on some of the booming demand in 2022.
The company’s small to mid-size UAVs have been key in the US plan to support the Ukrainian war effort, which increases demand for the company’s flagship products.
The demand for small combat drones is expected to steadily increase, which opens up opportunities for AeroVironment to capitalize on.
The company also had a significant amount of backlog, namely $307.6 million as of the end of Q4 FY2022.
Joby Aviation Inc is a vertically integrated air mobility company that is engaged in building an electric vertical takeoff and landing aircraft optimized to deliver air transportation as a service. The company also plans on providing a ride-sharing service. The company was founded in 2009 and is headquartered in Santa Cruz, California, United States.
Joby Aviation is a relatively new company to the financial markets, entering the New York Stock Exchange in August 2021. Unlike other entries on our list, Joby does not yet produce aerial electric vehicles and is a pre-revenue stock.
2022 has been a rough year for speculative assets and rising inflation and recession fears signaled some alarm bells for investors about unprofitable, overvalued, and pre-revenue companies. This drop caused Joby to have a rollercoaster in 2022 and falling to $4 from its yearly high of $7 in August, 2022.
Analysts are skeptical of the stock and many industry experts have also raised some concerns about the viability of mass adoption of such aerial vehicles.
|Q3 FY2022||Q2 FY2022||Q3 FY2021||Full FY2021|
|Cost of revenue||–||–||–||–|
|Operating expense||$97.1 mln||$99.4 mln||$67.7 mln||$259.1 mln|
|Net income||($79.2 mln)||($49.6 mln)||($78.9 mln)||($180.3 mln)|
|Assets||$1,273.8 mln||$1,356.3 mln||$1,532 mln||$1,488.4 mln|
|Liabilities||$113.7 mln||$127.7 mln||$227.3 mln||$171.6 mln|
|Equity||$1,160.1 mln||$1,228.6 mln||$1,304.7 mln||$1,316.8 mln|
|Cash & cash equivalents||$1,074,5 mln||$1,151.5 mln||$1,362.5 mln||$1,298.8 mln|
|Free cash flow||($73.7 mln)||($61.3 mln)||($166.3 mln)||($228.1 mln)|
Being a pre-revenue stock means that each year that Joby closes without revenue, it burns through some of its cash reserves. While the company has decent reserves in the short run, it is nonetheless in a time crunch to solve its production issues and deliver a working product to the market.
The gradual cash decline and challenging supply chain issues mean the company’s cash reserves could dip below $1 billion in the next quarter. Fortunately for the company, Joby Aviation does not have many outstanding liabilities, which allows the company to raise debt capital and replenish cash reserves when needed.
Joby Aviation received a $60 million investment from Delta Air to aid the development of its air taxi, which is expected to launch in 2024. The company will initially offer passengers its taxi service from airports in Los Angeles and New York.
Delta also stated that the investment size could increase to $200 million, which would see Delta assume a share of over 6% in the company.
The Federal Aviation Administration granted Joby its Part 135 Air Carrier Certification in May 2022. The company is working on developing its eVTOL aircraft and building take-off and landing sites, which will require additional regulatory approval.
"..our long-term vision is to build a global passenger service with this aircraft saving a billion people an hour every day while helping to protect our precious planet" - JoeBen Bevirt
The Lockheed Martin Corporation is an aerospace and security company that specializes in the research, development, and manufacture of technology systems worldwide.
The company produces:
The company frequently works with the US Department of Defense and also sells its products through US government contracts. Lockheed Martin Corporation was founded in 1912 and is headquartered in Bethesda, Maryland.
Similarly to Northrop Grumman, Lockheed Martin was one of the larger defense contractors that enjoyed a successful 2022. The stock climbed from $360 to $470 since the start of the year. Due to Lockheed’s strong aerospace division, the bulk of this rise was due to the ongoing war and increased demand for military hardware and vehicles.
"There's increased demand.. for the kinds of systems and products and platforms that you need to defend your country" - Jim Taiclet
Lockheed Martin also maintains an attractive dividend yield of 2.54% annually, which maintains the stock’s popularity among dividend investors.
|Q3 FY2022||Q2 FY2022||Q3 FY2021||Full FY2021|
|Revenue||$16,583 mln||$15,446 mln||$16,028 mln||$67,044 mln|
|Cost of revenue||$14,463 mln||$13,490 mln||$13,726 mln||$56,315 mln|
|Operating expense||–||$7 mln||$8 mln||$62 mln|
|Net income||$1,778 mln||$309 mln||$614 mln||$6,315 mln|
|Assets||$52,030 mln||$51,758 mln||$51,843 mln||$50,873 mln|
|Liabilities||$40,064 mln||$40,326 mln||$42,212 mln||$39,914 mln|
|Equity||$11,966 mln||$11,432 mln||$9,631 mln||$10,959 mln|
|Cash & cash equivalents||$2,430 mln||$1,775 mln||$2,727 mln||$3,604 mln|
|Free cash flow||$2,728 mln||$1,027 mln||$1,621 mln||$1,860 mln|
Lockheed maintains stable profitability despite the relatively high cost of revenue, which is characteristic to the defense industry due to the high degree of physical assets in production.
The company has a strong EPS and a decent amount of cash in reserve, while liabilities are in decline YoY. The company also maintains a positive free cash flow, which is another reassuring sign for long-term investors in the company.
The Aeronautics and Space segments have been strong revenue growth drivers for Lockheed Martin. The company also announced a $14 billion share buyback plan and expects little to no sales growth in 2023.
The company has invested $100 million in Terran Orbital - a spacecraft manufacturing company.
Lockheed also has an extensive plan in place to modernize its fleet of Sikorsky aircraft.
Kratos Defense & Security Solutions Inc is a government contractor of the Department of Defense. The company offers its services through two segments:
The company was founded in 1994 and is headquartered in San Diego, California, United States.
Kratos stock has had a rough 2022. The defense contractor lost around 50% of its value since reaching the peak $22 price tag in April. Part of the reason is the ongoing unprofitability of the company. While losses are quite low, investors have been shying away from unprofitable companies and shifting their focus toward more stable stocks and alternative assets.
Analysts are hopeful of a turnaround for Kratos, as the company keeps attracting new contracts and is poised for growth in the long run.
|Q3 FY2022||Q2 FY2022||Q3 FY2021||Full FY2021|
|Revenue||$228.6 mln||$224.2 mln||$200.6 mln||$811.5 mln|
|Cost of revenue||$173.7 mln||$166.4 mln||$140 mln||$586.4 mln|
|Operating expense||$58.1 mln||$53.7 mln||$49.8 mln||$195.4 mln|
|Net income||($8 mln)||($4.7 mln)||($2.4 mln)||($2 mln)|
|Assets||$1,568.1 mln||$1,583.3 mln||$1,577.8 mln||$1,589.5 mln|
|Liabilities||$629.4 mln||$637.4 mln||$620.9 mln||$629.2 mln|
|Equity||$943.2 mln||$945.9 mln||$956.9 mln||$960.3 mln|
|Cash & cash equivalents||$125.2 mln||$142.4 mln||$369.9 mln||$349.4 mln|
|Free cash flow||($15.3 mln)||($33.1 mln)||($0.6 mln)||($15.7 mln)|
While the company’s losses are slim, the ongoing negative cash flow and modest QoQ revenue growth have weighed down the stock.
The cash reserves are also somewhat slim, which can be of concern to investors due to the quarter-on-quarter losses posted by the company.
"So when we say we're going to use leading edge technology we're using proven technology, we integrate it into a system to deliver something.. by using that proven technology and not developing an entire new rocket motor.. we save time the technology risk is less, its affordability is guaranteed because we're using proving systems, and in addition to that it de-risks it both from a schedule and a financial standpoint" - Eric DeMarco
Kratos received a MACH-TB contract from Dynetics to work on increasing US hypersonic flight testing.
The Kratos DRSS division, which oversees the development of rocket support systems, has decades of experience in hypersonic systems, which could be an important growth driver for the company down the line.
Kratos has increased its investments in affordable solid rocket motors to increase the range of testing for the MACH-TB program.
The global recreational and defense drone markets are poised for steady growth throughout the coming decade, with civilian applications driving the bulk of this growth. Military drones have come back into the limelight since the start of the war between russia and Ukraine and governments have started increasing their defense spending and driving demand for unmanned aerial vehicles up.
Some of the largest defense contractors of the US Department of Defense like Northrop Grumman and Lockheed Martin have enjoyed an especially fruitful 2022, while others, like the pre-revenue Joby Aviation, have slid lower due to high inflation and investor aversion to growth stocks.
There is a growing number of drone stocks on the market. From large, multi-billion dollar defense contractors engaging in military drone systems, to commercial drone startups working on aerial taxi services.
Both the military and civilian drone markets are expected to grow considerably throughout this decade - with the military drone market reaching over $30 billion by 2030, while the civilian market is expected to surpass $55 billion.
Analysts are bullish on the largest defense manufacturers such as Northrop Grumman and Lockheed Martin, while investors with a longer time horizon could find the growth targets of Kratos Defense or AeroVironment more appealing.