This document recommends investing in an index of 9 companies involved in the drone industry. It provides an overview of the growing drone market, both for military/defense uses as well as commercial applications. Spending on defense drones has increased significantly in recent years. The commercial drone market is also growing rapidly, especially in areas like data collection, services, and recreational uses. The drone industry is expected to generate over $90 billion globally in the next decade, presenting an investment opportunity in companies that manufacture drone parts and components.

1. Drones 9
Roland George Investments Program
BUY Recommendation
Gonzalo Arroyo-Baudet

2. Stetson University
This report is published for educational purposes
only by Gonzalo Arroyo-Baudet for the Roland
George Investments Program.
Exhibit 2: DRO9 Return vs SPX & Industry
-60%
-20%
20%
60%
100%
Apr-2007 Apr-2009 Apr-2011 Apr-2013 Apr-2015
DRO 9
Industry
SPX
Exhibit 1: Index Overview
Source: Thomson Baseline
Source: Bloomberg
Drone Index (DRO9)
P/E: $46.01 (as of 03/013/2016)
This Drone Index (DRON) tracks the price movements in shares of companies, which have a current
or future main business focus on the unmanned aerial vehicle industry and fulfill certain quantitative
criteria.
Investment summary
 Disruptive Industry: The drones are poised to radically change how people see and interact with
the world around them. Commercial uses are endless as well as innovative ways to incorporate
drones into a business’s growth and development creations. Drones are able to perform tasks that
were previously too expensive to consider. Commercial applications will drive the strong growth;
the drone industry will cumulatively generate over $90 Billion during the next decade.
 Early Movers: Drone total transactions jumped over 81% from 2014 to 2015. Also, total venture
capital amount raised 175% to over $570 million. Big companies, like Google, Facebook or Intel
are not allowing this opportunity to pass. Therefore, they have been acquiring and merging with
venture unmanned aerial vehicle companies. Drone industry has erupted and this is the perfect
moment to invest in it. As soon as the FAA opens the commercial flying for industries like
transport, drones sales will see an exponential growth.
 Drones for Drones 9: Despite the willingness to invest in a drone company, this is a tough job to
do. The biggest drone companies, like DJI or Yuneec, are privately owned and we cannot invest in
them. However, drone manufacturers are not the only ones making a profit in this industry. 80%
of the parts used by these companies- gyroscopes, chips, cameras or sensors- are produced by
other companies. For that reason, an index of 9 companies that manufacture parts, sell drones and
develop commercial applications is the best way to invest in the drone industry. It has an
undervaluation of 79%.
Introduction: The origin of drones can be traced back to the middle of the 19th
century. However, drones
most similar to the ones we see today, were the ones used during WWII in the battlefield. Between then and
2005, drones have mostly been used by worldwide defense departments in their military operations. In 2005,
drones started entering the consumer market space and the FAA came up with a memorandum of interim
policy, which approved the use of domestic drones. Although drones have been around for some time, due
to FAA regulations and technology limitations, adoption of drones for commercial applications has been a
slow.
Another name for drones is UAV (Unmanned Aerial Vehicles) or UAS (Unmanned Aerial Systems).
Industry proponents prefer the use of these terms over ‘drones’ because of its negative connotation used
heavily in the context of war. Thus, professionals of the industry for commercial application are seeking to
the term UAV/UAS. In this paper I will use both terminologies.
Company Name Ticker Price
AeroVironment AVAV 26.88$
Elbit Systems ESLT 87.09$
Parrot PARRO 18.57$
Invensense INVN 8.14$
IXYS Corp. IXYS 11.83$
Ambarella AMBA 39.20$
STMicroelectronics STME 5.99$
Drone Aviation Holding Corp. DRNE 3.11$
Trimble Navigation Limited TRMB 24.83$

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0%
20%
40%
60%
80%
100%
2007 2010 2013 2016
Defense
Consumer
Exhibit 5: Unmanned Aerial Vehicles
Exhibit 3: Defense vs. Consumer Share
Exhibit 4: Defense/UAV spending ($ B.)
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Industry: The economic impact of UAS is tracked by a number of industry groups and private consulting
firms. Their forecasts concerning the outlook for drone manufacturing and sales vary widely. In 2015 total
drone industry generated $4.4 Billion in the U.S., which includes military, recreational and commercial
sectors. Over the next decade, the industry is assumed to cumulatively generate over $90 Billion.
Militaries were the early adopters of drones and are still as shown in the graph the biggest sector; however,
at the same time there is no sign of significant investment for the future. Currently, the CIA uses drones
primarily for surveillance, although they have the authority to use them to carry out strikes if it’s necessary.
The U.S. Armed Forces also use drones for combat missions and the homeland security uses them to control
the American borders.
Global and U.S. spending on drones in the defense industry has increased in the last 10 years by 103% and
80% respectively. Even though, drones have been used in the military since couple decades this industry is
still growing.
These are some of the unmanned aerial vehicles used by the government:
 General Atomics Reaper: Originally constructed for surveillance. However, it is currently used
for combats. It carries laser guided bombs, missiles, etc. It can fly up to 42 hours and can read
license plates from a distance of 2 miles.
 Elbit Systems Hermes 450: It is used solely by the department of Homeland security for
surveillance and reconnaissance. It flies at high-altitudes, which helps the government
monitor large stretches of open territory.
 Smaller Drones: The Armed Forces also use small drones for battlefield reconnaissance,
laser target for missile strikes, and general surveillance. Smaller drones can be launched by
hand and remotely piloted using GPS. It allows the government to have constant
autonomous surveillance.
As drone technology continues to evolve, it will likely be used for monitoring domestic criminal
activity and terrorist activity. Legality of government surveillance is still in debate due to the
invasion of privacy. Each state can choose their legislation on how to use drones.
Recreational Drones
Consumer Drones industry is booming! It is a relatively new industry which is estimated to grow
30% annually for the next 10 years. The US market is not the biggest market yet due to the FAA
regulations; currently the biggest market is China but as soon as the FAA updates the law in the
United States, America’s market is expected to grow exponentially. Commercial and recreational use
generated $450 million in 2015, recreational use being a bigger share. Analyst forecasted global
sales of 350,000 units for 2015; however, the actual number was 1 million units. The main reason for
this boom is that the advances in technology of hardware and software have helped to reduce prices.
Not only flight hobbyists have been attracted by the lower prices, but also companies saw the
opportunity of using drones for data collection within a variety of industry applications. What has
been exclusively done by a helicopter or airplane rental in the past, can now be done by drones in
half the time and at half the expense, if not less. This shows the growth acceleration. FAA is pushed
to change the regulations of unmanned aerial vehicles. Now is the moment to invest in the drone
industry.
Drone Startups raised over $500million in 2015, investment research firm CB Insights reports. This
number represents a 300% increase over dollars invested in 2014.
Potential Sectors
Major differences exist between the specialized military market and the commercial drone market,
and therefore, the commercial drone market will require a "mind shift" towards general-purpose
manufacturing. In particular, these major differences require a mindset focused on cost reduction
while at the same time focus on adding new features and functions. The UAV market structure has
four main areas for product development:
1329
1948 1962
2.9
5 5.9
0
500
1000
1500
2000
2500
2005 2010 2016
UAVDefense

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Exhibit 6:UAV Sectors
Source: AUVSI
Exhibit 7: Unmanned Vehicles
Transactions
8 11 15
17
57
103
0
100
200
300
400
500
600
0
20
40
60
80
100
120
2010 2011 2012 2013 2014 2015
M&A Transactions
Capital Invested in $M
 Manufacturing: Industry participants can leverage the electronics industry's history of leading
reference designs to reduce costs and improve yields as well as to enable adjacent markets to
evolve. We expect there will be some attempts at standardization with regard to communications,
operating systems and other functions. Startup companies have been entering this market in the
last 2 years. At the same time, bigger companies – like Facebook, Google and Intel - are
acquiring these startups. In addition, we can see the trend of military drone manufacturers
moving into the commercial drone market, like Elbit Systems, AeroVironment or Raytheon.
 Data collection: Companies are constantly looking to get data and use it to target their goals in a
better way. Leveraging a variety of assets on the ground and in the sky will enable company
owners of commercial drones to build a view of historical patterns. These companies will be also
able to comprise a set of reference data that they can use to become more efficient in current
processes or even create new models. However, these data collection will bring up some privacy
questions, like who owns the data, what type of data can be owned or what data is considered
private or public, etc.
 Data servicing: There will be a need for data storage and for analytical software for each
application to crunch data and store results. Trimble Navigation provides services for data
collection and also the analysis of that data.
 End user: In this area, there is the possibility for software applications and hardware add-ons.
Parts like HD-cameras, microphones and sensors, specialized software controls, possible
preprogrammed flight patterns, additional encryption and decision-making software will be not
just focused on adding new features and functions but also on cost reduction.
Costs: The costs of UAS vary considerably, depending upon the product specifications and the uses
to which the craft is to be put. The market and price points for military and commercial UAS are
very different. One recent report identified distinct segments within the civilian drone market:
 Entry-level hobbyists pay up to $500 for a UAS kit that includes the drone, four rotors,
batteries, chargers, GPS, and spare propellers. Cameras are an added charge. These planes
can fly for up to 15 minutes on a battery charge at up to 22 mph, with a range of about
150-200 feet. They are controlled by a smartphone or tablet.
 Consumers with a higher professional interest may pay $750-$2,000 for a kit that includes
similar elements as a hobbyist kit, but with a UAV that can remain airborne for up to 25 minutes

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-100%
0%
100%
200%
300%
400%
500%
600%
2016 2018 2020 2022 2024
U.S
World
Source: SUAS
Source: Bloomberg
with a range of more than half a mile. These UAS may have more advanced cameras, and
usually have a separate controller.
 Commercial users may pay $10,000 or more for a UAV that has six rotors, larger propeller
blades, or even an alternative configuration with wings. They are designed to carry a larger
payload than the smaller UAVs and may have a battery capacity that would let them fly for up to
an hour. Their controller software may include a database of no-fly zones to ensure the UAV
does not get close to airports or other prohibited areas.
Commercial Drones
Until now, recreational drones have had a bigger growth than commercial drones in the United States.
Hobby drones can be easily purchased today, ranging from several hundred to several thousand dollars in
cost. Their adoption in the market has seen a steady increase in the last few years. Hobbyists represent the
early adopters of the technology, and as the technology matures, this market will see further growth, but
will be outpaced by the commercial applications. The drone companies that are going to succeed, are those
moving out of the consumer and stronger in the commercial. By 2019, the commercial small UAS sector
would have revenue of more than $5.1 billion — five times the revenue of the consumer drone market and
more than twice the revenues of the combined military and civil market currently dominating the industry.
Commercial usage of drones has become more popular this last year. They provide some of the
observational or sometimes transportation functionality of a helicopter, without the cost of an onboard
pilot, or even a pilot at all. They can undertake tasks that were previously too expensive to consider. It is
true, that for some specific applications more expensive drones are needed; they can range from $25,000 to
$50,000. Farmers can survey crops, without needing to visit their fields. Livestock owners can undertake
aerial searches for lost animals or even herd them. Police forces and rescue units can use them to
complement search and rescue missions, especially by using infra-red cameras. Geologists can use them to
map unchartered territories, or to survey for oil. UAVs can inspect wind turbines, which reach several
hundred feet in the air, removing the need for someone to climb up a structure. Off-shore oil rigs can be
similarly inspected. Archaeologists have used drones to create 3D images of sites, and also to patrol for
looters. Finally, they can be used to distribute medicines, in the absence of viable roads, as part of disaster
relief or other humanitarian campaigns. The FAA has cleared more than 3000 companies to use drones and
is expected that by 2019 it will hit 30,000.
For the most part, commercial applications for drones fall into two major steps:
 Aerial Imagery: The drones offer a multitude of purposes, ranging from the ability to take
aerial footage to digital elevation maps using geo-referencing capabilities. The platforms
can take images that are sharper and more detailed than just a decade ago. Users have the
ability to take a range of images on their own time schedule and at affordable pricing.
 Data Analysis: The value of flying a commercial drone happens post-flight. The data
collection and image processing capabilities and techniques have the ability to produce
minuscule measurements; anything from crops to water quality can be detected in a
fraction of the time and cost it would take with a helicopter. The reports produced post-
flight offer end users an easy-to-read product that adds value to their operations.
Industries that are benefiting from the usage of drones are Agriculture, Movie Filming, Real Estate,
Surveillance, Oil and Gas, News Media, Sports, Railroad, E-Commerce and Delivery. The latter two
will need to wait until the FAA updates the current legislation, which is expected to happen by the
end of 2016.
Exhibit 8: Cumulative Commercial
Industry Growth U.S. vs World
Exhibit 9: Drone Application Market
% Difference

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5
0%
20%
40%
60%
80%
100%
Jul-2005 Jan-2008 Jul-2010 Jan-2013 Aug-2015
0%
10%
20%
30%
40%
50%
Jul-2005 Jan-2008 Jul-2010 Jan-2013 Aug-2015
Source:Reuters
Source: Reuters
Source: TRMB CC
Applications
Agriculture: Agriculture is a key segment for the worldwide drone market, and as such, it represents
the opportunities that exist in the niche drone market. AUVSI estimates that agriculture will account
for 80% of the commercial drone market initially. Given the amount of agriculture and the demand
for it, agriculture should remain a large and growing segment of the commercial drone market.
Worldwide, drones (both aerial and ground) are used in agricultural applications, such as aerial
application (crop dusting), inspection, surveying, plowing and cultivation. On most commercial
farms, these machines will be found favorable because they can work longer hours, be
programmable and require little maintenance. Because of their versatility, UAVs could be put to
work on a farm to do any number of jobs in a given day, from warding off birds, pollinating crops,
surveying for erosion or infestation, and irrigating or chemical spraying in the evenings. The UAV
can collect a large amount of data on crops that cannot be gleaned as easily or efficiently by humans
on the ground. This collection means higher yields and faster diagnoses, as well as better decisions
when problems occur. Drones can survey a crop every week, every day, or even every hour due to
the low price and easy use. Agriculture is becoming an increasingly data-driven industry.
Police Surveillance: Unmanned Aerial Vehicles have the potential to protect lives by being the first
ones to investigate wildfires, crime scenes and chemical spills. Instead of having to send a helicopter
and people by foot, police could use drones to get to a particular place quickly and without too much
cost. Different counties are testing the drone applications and are creating programs. However,
people are concerned about privacy infringements by law enforcement drones with high-tech
cameras. No one likes to be spied on. Thus, the FAA needs to come up with some specific
regulations of what the different departments are allowed to do.
Movie Filming: Drone use in movies allows directors to shoot scenes that have been impossible to
do in the past. Instead of hiring an entire helicopter filming crew, the director can get the shot they
want without any difficulties by using drones. Directors don’t have to worry as much about the
logistical challenges experienced when flying helicopters either. Some helicopters cannot fly at
lower altitudes, for instance, while drones can fly anywhere. This was one of the first industries that
the FAA gave the 333 exemption.
Railroad/Crane: This industry is exploring the use of the remote controlled flying machines to cost
effectively monitor hundreds of miles of track, to aid in maintenance work and to enhance security.
Drones are also extremely effective in the crane industry, being used to find maintenance issue
instead of risking workers to climb up.
Oil and Gas: Unmanned aircraft systems (UAS) can be used to measure and quantify oil spills,
determine how the oil is moving in water and provide information and imagery to the command
center. This critical information increases the situational awareness of first responders to the
incident, increasing safety and the ability to make more rational decisions in the clean-up planning
efforts. Another use of UAS is monitoring pipelines. IR imaging capabilities enable the unmanned
aircraft to detect leaks that would otherwise not be visible. Additionally, specialized sensors can be
used to detect emissions of gas leaks. Offshore platforms inspections can also be conducted by
drones, making life easier for all of these companies.
Transport: Within the next five years, drones could become widely used to help transport goods.
There is a keen interest in this industry and a rapid growth in technology. The only constraint is that
regulations will limit the role of drones in delivering goods to customers in the United States, at least
in the short term. Amazon and other big companies interested in drones have the power to lobby
congress and push the FAA to open the drone circulation for companies.
Regulatory bodies currently lag behind technological advances and market demand is already
exerting significant pressure on government agencies to enact policy reform. To see how much the
drone industry is growing, a drone racing league has been created.
Exhibit 10: Gross Margin 9 companies
Exhibit 12: Aerial Sensor Image
Exhibit 11: Gross Margin Index

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Source: FAA
Source: FAA
0
100
200
300
400
500
600
Construction Utility
Inspection
Real Estate Aerial
Surveillance
Agriculture
FAA Regulation
The Federal Aviation Administration mandates to register any drone for recreational purposes. The
process is fairly simple: You merely need to pay $5 and read the guidelines for the safety of the
aerial vehicles. These are the recommendations hobbyist need to follow:
Compared to buying a drone for recreational purposes, an unmanned aerial vehicle for commercial
purposes, the process is more complicated, at least in the United States. Any aircraft operation in the
national airspace requires a certificate and a registered aircraft, a licensed pilot, and operational
approval. First of all you need to fill out a petition for the 333 Exemption, which the certificate the
FAA grants specific companies is willing to use drones for commercial purposes. The companies
granted with this certificate need to follow all the regulations the FAA writes on the document. It is
important to note that every company has different regulations.
By the beginning of 2015, only about a dozen companies had been approved to fly drones
commercially. As of February 2nd
, the Federal Aviation Administration (FAA) has issued 3356 so-
called Section 333 exemptions to U.S. companies, clearing them to operate drones for commercial
purposes. Presently, the aviation authority issues about 60 Section 333 exemptions per week in an
attempt to stay ahead of the thousands of applications it has received since last year. California,
Texas and Florida are the three states with the largest number of approved exemptions. 85% of
companies holding exemptions are small businesses. Larger businesses are mainly focused on more
complex operations than are currently allowed by the exemption process. Thus, they are trying these
processes in countries like France, Canada and Australia. Amazon is testing the Amazon Prime in
Canada, UK and Netherlands; and Google in Australia.
Most FAA advisory board is mostly represented by defense constructors. Companies like DJI, Parrot
or 3D Robotics do not have any members at the FAA. There is a conspiracy that says defense
companies like Lockheed Martin, Boeing or Raytheon are slowing down this process because they
want to have a big stake on the commercial drone industry. However, other big companies like
Amazon and Google got interested in this industry in the last 2 years and they have the lobby power
to make the FAA reconsider the actual rules for commercial drones.
Another reason to explain the slowness of the FAA compared to other countries like France is that
America has become a litigation society. Companies and individuals can sue each other for any
controversy and drones are a big controversy. How many privacy issues would be taken to court
because of a drone flying over one’s private property? One of the biggest challenge is winning
public approval. The United States is very bureaucratic and while technology development is
happening in the west, rules happen in the east. The east coast is notorious for taking everything step
by step to ensure its legality.
Drones that are being used as toys are not the reason we want to invest in this industry. Commercial
drone is the segment with the most potential. Thus, the FAA needs to come up with guidelines for
the use of commercial drones. In June 2015, the FAA spoke in front of Congress and said publicly
that they’d finalize the new UAV certification regulations within a year. It is true that after this, it
1. Fly below 400 feet and remain clear of surrounding obstacles
2. Keep the aircraft within visual line of sight at all times
3. Remain well clear of and do not interfere with manned aircraft operations
4. Don't fly within 5 miles of an airport
5. Don't fly near people or stadiums
6. Don't fly an aircraft that weighs more than 55 lbs.
7. Don't be careless or reckless with your unmanned aircraft
Exhibit 13: Current 333
Exemptions by Industry
Exhibit 14: First 1000 Exemptions vs. Today
Today
First 1000

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Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
would still need to pass through additional regulatory bodies and then go through our legislative
process. I expect that by mid-2017, drones could start playing an important role in our everyday
lives.
Countries like France, Sweden, and Norway have less strict rules governing the commercial use of
drones, which leads the U.S. to lose out to other countries when it comes to drone technology
innovation. An AUVSI report in 2014 concluded that delays in integrating drones could cost the
United States more than $10 billion a year in lost economic activity.
Index Companies’ Description
Drone Manufacturers: these companies ensemble the drones and sell them directly or through
retailers to consumers and governmental organizations.
1. AeroVironment designs, develops and produces unmanned aircraft systems (UAS)
mainly for the U.S. Department of Defense and allied military customers. The different
aircrafts prove their value on the battlefield on a regular basis by providing their operators
with critical information to help them make better decisions. They are also moving to the
commercial sector, providing different companies with the applications needed to protect
the public, monitor wildlife, manage resources or promote science. With over 25 years of
experience with drones, AeroVironment is known for delivering reliable, safe and
effective UAS solutions. In addition, the company supplies charging systems and services
for electric vehicles, or EVs, and power cycling and test systems to commercial, consumer
and government customers. Revenue comes mostly from these two areas; AeroVironment
believes that these markets have a significant growth potential.
2. Parrot (EPA: PARRO) is based in France, one of the most developed countries in
aviation. It currently employs more than 900 people worldwide and generates the majority
of its sales overseas. Parrot has been listed on Euronext Paris since 2006. Parrot creates,
develops and markets advanced technology wireless products for consumers and
professionals. The company builds on a common technological expertise to innovate and
develop in three primary markets: drones, automotive and connected objects. Drones
generate 60% of their revenues, being also the market with the biggest growth in 2015;
sales increased 140% from 2014 to 2015. They sell drones for recreational and commercial
purposes. Even though recreational sales are bigger than commercial, they are trying to
move stronger into the professional use.
3. Drone Aviation Holding Corp (OTC: DRNE) provides critical aerial and land
surveillance and communications solutions to government and commercial customers. It
utilizes a unique tethering capability which allows it to operate drone systems in the
National airspace within FAA guidelines for safe operations. Drone systems are designed
and developed in-house, utilizing proprietary technologies and processes that result in
compact, rapidly deployable aerostats solutions. DRNE has proven that it can fulfill
critical requirements by the military and law enforcement in the U.S. and other different
nations. DRNE owns and operates Florida-based “Lighter Than Air Systems Corp”
(LTAS), a developer and supplier of aerial solutions to the U.S. Government, State
municipalities, and commercial entity.
Parts Manufacturers: Drone manufacturers get 80% of the parts of a drone from other companies,
including chips, semiconductors, sensors and batteries for their product.
4. IXYS Corp. (NASDAQ: IXYS) is a premier power semiconductor manufacturer. Its
diversified product base of specialized power semiconductors, integrated circuits and RF
power is utilized by more than 2500 customers worldwide, ranging across industrial,
transportation, telecommunications, computer, medical, consumer and clean tech markets.
Exhibit 15: AVAV Return vs Index
Exhibit 17: DRNE Return vs Index
Exhibit 16: Parrot Return vs Index
-50%
0%
50%
100%
150%
2007 2009 2011 2013 2015
DRO
AVAV
-100%
-50%
0%
50%
100%
150%
2007 2009 2011 2013 2015
DRO 9
PARRO
-100%
-50%
0%
50%
2013 2014 2015
DRO 9
DRNE

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-100%
-50%
0%
50%
100%
150%
2007 2009 2011 2013 2015
DRO 9
STME
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
IXYS is a supplier of the drone industry, most notably power controllers and chipsets.
None of the big drone companies like DJI, 3D Robotics or Parrot makes the parts for the
drones. Thus, Investing in a company that makes parts of drones makes sense.
5. Ambarella (NASDAQ: AMBA) is a leading developer of low-power, high-definition
(HD) and Ultra HD video compression and image processing solutions. The company’s
products are used in a variety of professional and consumer applications including security
IP-cameras, wearable cameras, flying cameras and automotive video processing solutions.
The company is the forefront of a new generation of high-performance 4K Ultra-HD
flying cameras designed for professionals in areas such as commercial filmmaking,
scientific research, equipment inspection, video journalism, and more. These cameras are
pretty small and have long battery lives; they permit companies have use them for
different commercial applications. Ambarella is currently known for supplying cameras
for hobby videographers and outdoor enthusiasts.
6. InvenSense (NYSE: INVN) is engaged in designing, developing, manufacturing and
marketing devices and related software for sensor system-on-chip for the motion and
sound markets. The company is a leader in the electronic motion sensor chip industry, with
businesses in a multitude of arenas, including smartphones, tablets, gaming devices, and
optical image stabilization. Motion tracking chip technology has gone from being virtually
non-existent couple of years ago to finding applications in a countless of technologies .The
Company's motion solutions detect and track an object's motion in three-dimensional
space and is used by different big companies like Google, Microsoft, Apple or Lego. Even
though they are already established in some industries, the vast majority of the company’s
potential comes from the drone industry. InvenSense is already supplying the drone
companies with its technologies, like the MPU-6000 DMP processor, which acts as an
accelerator, gyroscope, and magnetometer.
7. STMicroelectronics (NYSE: STM) is a global leader in the semiconductor market serving
customers across the spectrum of sense and power and automotive products and embedded
processing solutions. From energy management and savings to trust and data security,
from healthcare and wellness to smart consumer devices, in the home, car and office, at
work and at play, ST is found everywhere microelectronics make a positive and innovative
contribution to people's life. Drone is an industry they have a big market share already.
One of their MEMs consumers is Parrot; 3D Robotics uses processors and sensors in their
UVA’s from STM, too.
Defense Manufacturers: The armed drones are used for daily surveillance and attacks in
battlefields like the Gaza-Strip. The use of drone technology has changed the nature of modern
warfare, enabling governments to launch attacks without any need for boots on the ground.
8. Elbit Systems (NASDAQ: ESLT) Elbit Systems is Israel’s largest publicly traded arms
and Security Company. Elbit is growing fast. It has absorbed dozens of companies since
2000 and now employs well over 11,500 people as well a presiding over a considerable
global network of subsidiaries and affiliated corporations. Elbit is a company with
international reach, in fact 75% of its market is outside Israel. The company has military
contracts with governments in the US, UK and Europe, Africa, Asia and South America.
85% of drones used by the Israeli military are manufactured by Elbit.
Data Analytics: A consulting company gathering useful data from the drones used for businesses is
necessary. This includes data collection, analysis and final proposal containing necessary actions in
order to maximize the potential growth of a business or entity.
9. Trimble Navigation Limited (NASDAQ: TRMB) was one of the first companies to get
the 333 exemption by the FAA. It performs precision aerial surveys by taking digital
photographs. The company targets these industries: surveillance, agriculture, oil & gas,
Exhibit 21: ESLT Return vs Index
Exhibit 20: STM Return vs Index
-50%
0%
50%
100%
150%
2007 2009 2011 2013 2015
DRO 9
ESLT
-50%
0%
50%
100%
150%
2007 2009 2011 2013 2015
DRO 9
IXYS
Exhibit 18: IXYS Return vs Index
-50%
0%
50%
100%
2012 2013 2014 2015
DRO 9
INVN
Exhibit 19: INVN Return vs Index

10. 11/30/15
Gonzalo Arroyo-Baudet
Stetson University Student Research
9
Source: Reuters
Source: AUVSI
Source: Bloomberg
mining, construction and environmental industries. The system autonomously captures a
series of high-resolution images during flight, which is typically up to 50 minutes covering
approximately 1 square mile when flying 400 feet above the ground. Using Trimble
Business Center Aerial Photogrammetry software, images are used to easily generate 2D
and 3D deliverables such as orthomosaic images, three-dimensional point clouds and
contour maps. The Trimble UX5 collects large amounts of data, faster than traditional
surveying or mapping technologies. TRMB doesn’t just collect the data; they also provide
consulting services to the companies that need help to analyze the data. The Company
operates through four segments: Engineering and Construction, Field Solutions, Mobile
Solutions and Advanced Devices. The Engineering and Construction segment provides
heavy civil construction, building construction and geospatial solutions. The Field
Solutions segment offers positioning systems, automated application systems, and data
collection and integration systems. The Mobile Solutions segment includes its
Transportation and Logistics, and Field Service Management businesses. The Advanced
Devices segment includes its Embedded Technologies, Military and advanced systems.
Index Creation
Investing in the UVS’s industry is tough because most companies that manufacture drones are
privately held and thus, we are unable to invest in them. However, there are some publicly traded
companies that have some direct or indirect relationship with the drone industry. As the analysis
states, drones have a lot of potential, but it is risky to solely invest in one company due to the
potential risk of failure. To avoid this risk, I created an index of 9 companies that are related to
drones in different ways, decreasing the probability of losing one’s whole investment. The index
includes drone manufacturers (PARRO, AVAV and DRNE), chip manufacturers (AMBA),
semiconductor manufacturers (IXYS and IXYS), sensor/GPS manufacturers (INVN), data
collectors/analyst (TRMB) and military UAV manufacturers (ESLT).
To create the index of these 9 drone related companies, I followed 4 different steps. First, I collected
data from each individual company, more specific I looked at the income statement and price of the
stock of the last decade. I calculated quarterly growth rates for stock return and revenue and also
profit and gross margins; R&D spending growth was also used. I run regressions for each individual
company of stock return and revenue growth and perceived that the correlations were low, meaning
that stock performance was not much affected by the revenue in a significance manner.
For this reason, I bundled the 9 companies into 1 index (DRON), averaging their revenue growths
and stock performances. Then, I ran a regression line again and found out that the correlation was
higher. Revenue growth and stock return has a higher correlation for the index than for each
individual company. However the t-stat value was not significant. Thus, I tried two different
variables. These variables were lagging the stock return or the revenue by one quarter. The results
stated that last quarter’s stock return and this quarter revenue had the highest significance with a
correlation of 7.5%.
Nevertheless I wasn’t content with this significance level yet. In the last correlation, the 9 companies
had an equal weight for the regression test. Thus, I weighted the index by the revenue each company
brought to the index. I added all the revenue and divided each company’s revenue by the total
revenue. This means, each company has a different weight when running the regression between t-1
stock return and revenue. By doing this, the significance increased to almost 90%.
By using statistic formulas I was able to find the best index weight for it to have the highest
correlation possible with significance higher than 95%. Exhibit X shows the final weight for each
individual company. With these weights revenue growth and stock performance correlate (adjusted
R^2) almost 10% and have a significance of 96%.
Exhibit 24: Drone Sellers
Exhibit 22: TRMB Return vs Index
Exhibit 23: DRO9 Rev. Growth/ Industry
-100%
-50%
0%
50%
100%
150%
200%
2007 2009 2011 2013 2015
DRO 9
TRMB
-40%
0%
40%
80%
120%
2007 2009 2011 2013 2015
DRO9
Industry

11. 11/30/15
Gonzalo Arroyo-Baudet
Stetson University Student Research
10
Exhibit 26: Revenue growth U.S. vs Global
Source: SUAS Source: SUAS
Apr-2013 Jul-2013 Oct-2013 Jan-2014 Apr-2014 Jul-2014 Oct-2014 Jan-2015 Apr-2016 Jul-2016 Oct-2016 Jan-16
Revenue Growth 3.99% 3.63% 6.08% 3.29% 27.36% 28.50% 30.94%
Revenue $308 $314 $309 $315 $304 $306 $307 $331 $344 $357 $379 $391 $1,874 $2,407 $3,152
100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Cost of Revenue $208 $213 $213 $218 $205 $210 $208 $199 $231 $240 $254 $261 $1,246 $1,599 $2,085
68% 68% 69% 69% 67% 69% 68% 60% 67% 67% 67% 67% 67% 66% 66%
Gross Profit $100 $101 $96 $97 $99 $96 $99 $132 $113 $117 $125 $130 $627 $809 $1,067
32% 32% 31% 31% 33% 31% 32% 40% 33% 33% 33% 33% 33% 34% 34%
Selling/General/Admin. Expenses $46 $45 $55 $38 $47 $48 $45 $45 $51 $53 $56 $57 $276 $353 $459
15% 14% 18% 12% 15% 16% 15% 13% 15% 15% 15% 14% 15% 15% 15%
Research & Development $36 $38 $38 $40 $41 $40 $39 $40 $43 $45 $48 $50 $239 $305 $398
12% 12% 12% 13% 14% 13% 13% 12% 13% 13% 13% 13% 13% 13% 13%
Total Operating Expense $191 $195 $205 $199 $202 $204 $197 $190 $219 $227 $242 $249 $1,193 $1,525 $1,983
62% 62% 66% 63% 66% 67% 64% 57% 64% 64% 64% 64% 64% 63% 63%
Operating Income $73 $69 $56 $70 $62 $60 $62 $58 $70 $72 $75 $78 $371 $475 $622
24% 22% 18% 22% 20% 20% 20% 18% 20% 20% 20% 20% 20% 20% 20%
Difference Between O.I. and EBIT $49 $37 $45 $45 $44 $45 $38 $42 $48 $49 $52 $54 $256 $327 $423
16% 12% 15% 14% 14% 15% 12% 13% 14% 14% 14% 14% 14% 14% 13%
Net Income Before Taxes $24 $32 $11 $25 $18 $15 $24 $16 $23 $23 $23 $25 $115 $148 $199
8% 10% 3% 8% 6% 5% 8% 5% 7% 6% 6% 6% 6% 6% 6%
Provision for Income Taxes $5 $8 $3 $8 $4 $4 $8 $5 $6 $7 $7 $7 $33 $44 $59
2% 3% 1% 3% 1% 1% 3% 2% 2% 2% 2% 2% 2% 2% 2%
Net Income After Taxes $19 $19 $5 $17 $13 $8 $15 $11 $15 $15 $15 $16 $74 $95 $130
6% 6% 2% 6% 4% 3% 5% 3% 4% 4% 4% 4% 4% 4% 4%
Minority Interest -$1 $2 $5 $4 $1 $2 $5 $1 $3 $3 $4 $3 $15 $21 $28
0% 1% 2% 1% 0% 1% 2% 0% 1% 1% 1% 1% 1% 1% 1%
Net Income $18.32 $18.67 $5.95 $17.16 $12.50 $8.89 $15.31 $10.04 $18.85 $19.37 $20.46 $23.27 $111.38 $150.41 $210.43
Profit Margin 5.95% 5.94% 1.93% 5.45% 4.11% 2.91% 4.99% 3.03% 5.47% 5.43% 5.40% 5.95% 5.94% 6.25% 6.67%
2014 2015 2016
Quarterly I.S. in Millions $
Pro Forma Statement DRON Index
2018 20192017
I also found a strong correlation between R&D and Revenue Growth. Using the last 10 year growth
through 2015, there was a 68% correlation (Adjusted R^2). 68% of revenue growth can be explained
by Research and Development growth. All R&D spending money does not necessarily bring directly
innovations or improvements in the products. However, we can see there is a strong correlation.
Pro Forma
My financial analysis for the DRON Index is derived from my pro forma in which I utilized historical data
ranging back to the first quarter of 2005-, analyst estimates for each individual company and commercial
drone industry growth estimates from AUVSI (Association for Unmanned Vehicle Systems International).
Top-Line Growth: Revenue growth has averaged 11% annually in the last decade. This growth will
increase yearly as reflected in the Pro Forma. For 2016, I calculated a 17% increase. While analysts expect
the drone industry to grow 25% all over the word, I expect the United States will just increase 17% due to
FAA regulations. The FAA will establish a guideline for commercial use of drones by 2017. After this
establishment, the drone industry will grow at a 30% CAGR in the U.S. until 2025.
0
5000
10000
15000
2015 2017 2019 2021 2023 2025
North America
Europe
Asia
Latin America
Middle East
Global
-10%
0%
10%
20%
30%
0%
10%
20%
30%
40%
50%
2016 2019 2022 2025
U.S.
Yearly ∆ U.S. vs World
Cum. ∆ U.S. vs World
Exhibit 25: Revenue growth by region
World

12. 11/30/15
Gonzalo Arroyo-Baudet
Stetson University Student Research
11
Source: Bloomberg
Source: Bloomberg
Gross Margin & EBIT Margin: As a product of total revenue and cost of revenue, gross profit and Ebit is
also estimated to increase. Even though costs margins are being reduced, I used historical averages for
COGS (67%), SG&A (15%) and R&D (13%) margins. Historical Taxes are also being used. Thus, the
actual margins will be most probably better than the predicted ones; my predictions are neutral-pessimistic.
The graph shows the change of 9 companies individually and then all of them put together in the index.
Bottom Line Growth: Profit Margin has been averaging 4.3% of total revenue in the last 8 quarters. I
expect this margin to increase to 5.7-6.0% in the next two years. I expect net income to grow 75% over
2016 fiscal year. Also, we will see a 35% growth in 2017 in the DRON index.
Valuation
In this section, I estimate the fair value of the Index. It should be noted that all input data were derived
from historical company data and pro forma estimates.
Growth Duration Model: The Growth Duration valuation, a relative P/E model, is often used to compare a
company with significant growth potential to its stable industry. The accurate P/E ratio of an index is the
index's total price divided by its total earning. Again, I used the same as the previous weight to determine
the price of the DRON Index; I used a weighted market cap. This model is relevant for the index because it
has higher growth potential when compared to the average firm in the Industry Peer Group. Using earnings
growth rates of 75% for the index in the simulation, an industry P/E of 30 and estimated Earnings of $82
Million, the mean fair value is $3,841 Million, indicating an undervaluation of 79%.
Investment Risks
The commercial use of drones is a disruptive move for different industries. However, this shift has
some negative consequences. As more unmanned aircraft systems are in the market, fewer employees
will be needed, as drones slowly replace their current positions. Certain service jobs, delivery jobs,
pilots, surveyors, and others will see demand for their skills decrease sharply and thus, they will be
affected.
Privacy: When commercial or personal drones become abundant there are real concerns about
privacy, especially if drones are permitted to fly over private property. Nowadays, websites can track
measure attributed that describe users; drones with high resolution camera systems could also be
used by businesses to gather data about customers daily habits much in the same way . Also,
paparazzi and espionage companies would add further concerns. Anyone being able to spend $200-
300 will be able to fly a drone and start to espionage other people.
In addition, Criminals could (and already have) used drones for smuggling or to aid in criminal
activities like theft. Drones will create new kinds of illicit activities that authorities are not equipped
to respond to. Integrating drones into the current regulatory framework will be a challenge for the
FAA, which hasn’t created proper regulation for the use of UAV’s.
-60%
-10%
40%
2007 2009 2011 2013 2015
-20%
-10%
0%
10%
20%
2007 2009 2011 2013 2015
Exhibit 27: Revenue Growth 9 Companies
Exhibit 28: Revenue Growth Index
Rev. Growth Q12016 Q22016 Q3216 Q42016 2017 2018 2019 2020 2021 2022 2023 2024 2025
AnalystIndiv. Comp. 2.69% 2.32% 7.82% 2.39% 7.56% 12.24% 14.49%
Drone Industry 5.00% 4.22% 6.00% 3.00% 48.08% 45.89% 50.00% 41.82% 59.64% 45.95% 40.74% 34.21% 27.45%
Historical 4.29% 4.37% 4.43% 4.50% 26.45% 27.37% 28.34% 29.28% 30.23% 31.18% 30.12% 30.07% 32.01%
Pro Forma 3.99% 3.63% 6.08% 3.29% 27.4% 28.5% 30.9% 35.5% 44.9% 38.6% 35.4% 32.1% 29.7%