This is the second article in my blog regarding the ban of Chinese drones. (See the first here.) This is a hotly debated topic that tends to get emotional for drone professionals. I will do my best to lay out the facts as I understand them and stay true to the heart of this blog by making sense of what this means to investors in the U.S. drone industry.

I will use the phrase “Chinese drones” throughout this article, although the verbiage and intent of most legislation is broader than a single country of origin. The legal terminology is “covered entity”, which is a political term for a country or organization that no longer receives a Christmas card from the U.S. Government. 😊

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I wrote my previous article shortly after the 2018 U.S. Federal ban on Chinese drones. Some State and Local governments followed suit. In short, Federal agencies (such as Departments of Defense, Homeland Security, and Justice) were prohibited from purchasing and operating such drones or funding contractors to do so on their behalf. For the States and localities that followed suit, this impacted their public safety agencies and caused a setback to Drone as First Responder (DFR) programs, which largely depended on the quality and cost efficiency of Chinese drones.

Following the initial ban within the Department of Defense, there has been a clear escalation of restrictions on Chinese drones within the U.S. (and some European countries, which I will not cover here).

• 2020: The Department of Commerce emplaced export restrictions on a particular Chinese drone manufacturer.
• 2021: The Department of Treasury identified China’s leading drone manufacturer as part of the Chinese Military-Industrial Complex.
• 2024: The CISA and FBI issued an advisory regarding the security risks to critical infrastructure that may be introduced by Chinese drones.

Now, in summer 2024, the Countering CCP Drones Act (H.R. 2864) is expected to place increased restrictions on the import, purchase, and operation of Chinese drones. In particular, H.R. 2864 would restrict Chinese drones’ ability to operate on FCC infrastructure, essentially keeping them grounded. This would apply to new drones only—it is not expected to impact pre-existing drones.

The reasons for the restrictions have changed very little since 2017:

• There is a risk of sensitive imagery (information) being obtained by foreign intelligence agencies (similar to proposed bans on Huawei and TikTok).
• Market dominance is stifling U.S. manufacturers’ ability to gain traction or reach production at scale.
• Increased drone usage in armed conflict requires a trusted foundry to supply this critical equipment for our allies, both military and civil.

Opposition to this drone legislation has been vociferous, and the resistance appears to fall into two main categories:

• The Chinese drone manufacturers themselves
• The 70% of this country’s drone pilots who fly Chinese drones

Over the years, the opposition has vocally (sometimes unprofessionally) attributed blame for the legislation to a variety of sources: U.S. Army leadership, the Trump Administration, the Biden Administration, individual Senators and Congressmen, and finally U.S. drone manufacturers. Arguments tend to involve a lack of suitable alternatives, sometimes including accusations of xenophobia.

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With that background information, let us turn our attention to the primary purpose of this article: how can the retail investor make use of the facts and respond to current events?

For the moment, let us assume that a form of the proposed legislation passes—maybe this year, maybe in the near future. Military and Federal users (and some states) have already made the pivot to non-covered drones (that is, drones manufactured from a non-covered entity such as the U.S. or Europe). So I see the vast majority of affected drone operators being state/local governments, commercial and prosumer UAS pilots, and drone hobbyists. Within this group, the overwhelming majority of equipment is multirotor drones with one or more cameras.

Which commercial entities stand to benefit from this upcoming pivot? I identify two broad categories.

• North American and European multirotor drone manufacturers (enterprise-grade and below)
• Drone major component suppliers

My reasoning is that there are existing manufacturers based in the U.S., Canada, and Europe that currently have, or are able to rapidly develop, suitable products and a credible production capacity. Their demand for components (motors, avionics, cameras, etc.) will increase proportionally to sales projections. I also believe that we will see an increase in home-built drones, and small businesses building custom drones for niche applications.

For these demographics of companies, the offerings within the DRONES Index are sparse. As such, I am broadening today’s list to include foreign and OTC stocks. The following table is a summary of publicly traded companies falling into the two demographics mentioned above.

Category	Company	Ticker	Country
Drone Manufacturers	Teledyne Technologies Inc.	TDY	U.S.
	Ondas Holdings Inc.	ONDS	U.S.
	Drone Delivery Canada Corp.	TAKOF	Canada
	Volatus Aerospace Corp.	VLTTF	Canada
	Draganfly Inc.	DPRO	Canada
	Red Cat Holdings, Inc.	RCAT	Puerto Rico
	Parrot S.A.	PAOTF	France
Drone Component Suppliers	Qualcomm Inc.	QCOM	U.S.
	Ouster, Inc.	OUST	U.S.
	GoPro, Inc.	GPRO	U.S.
	Sony Group Corp.	SONY	Japan

Of the Manufacturers’ list, my belief is that Parrot S.A. (PAOTF) stands to gain the greatest share in the consumer/prosumer market. This segment represents the greatest overall quantity of drone pilots, and the equipment is typically priced at the lower end of the price range. I happen to own two Parrot drones that I fly commercially.

I believe that the greatest overall growth potential lies with Ondas Holdings, Inc. (ONDS). The company has been cash-flow negative since its 2020 inception as it has conducted a series of mergers and acquisitions (M&A). I believe it is well poised in the industrial segment with enterprise-grade hardware and software for a variety of applications.

Enough about the products, what about the stock? Using my homemade data-wrangling script and custom weighting criteria, here is how the Manufacturers’ stock prices have fared over the last three years.

As you can see, there is nothing special about these companies’ growth over this time span. It would appear that their future gain in market share is not yet priced into their share prices. This could represent an undervalued condition and buying opportunity for forward-thinking investors.

I don’t want to sugar-coat anything, most of these companies’ Cash Flow Statements look dismal. They are largely early-stage companies conducting fundraising rounds and have not yet entered mass production. There is significant financial risk in investing in such companies; however, with risk comes reward. Perhaps I will cover them in more depth in future articles.

There is a handful of privately held drone manufacturers that do not appear in this article because we are unable to invest in them. I wish them luck in their efforts to build a robust U.S. Drone Industry and thank them for their current contributions to a healthy drone ecosystem of innovation and production.

I encourage interested readers to add these stocks to your watchlists and monitor the news for updates on legislation. Share prices could skyrocket if a new market leader emerges from this list.

As always, conduct your own research and consult a Financial Advisor prior to making an investment decision. The author may own shares of the companies discussed in this article.