AeroVironment (NASDAQ: AVAV) has long traded at a premium that makes traditional value investors wince. With a $13.4 billion market cap, and trading at 175x trailing earnings and roughly 9x trailing sales, it’s scarily lofty.
But in the past 18 months the company has morphed from a niche drone maker into what management calls a “next‑generation defense‑tech prime,” thanks to a record order book, a game‑changing acquisition, and a policy catalyst most investors haven’t noticed.
When you adjust the lens to include those factors, AVAV starts to look surprisingly cheap.
What Multiples Miss
FY 2025 revenues rose by 14 % to $821 million, but bookings surged to $1.2 billion and the funded backlog finished the year at $726 million, up 82 % from 2024 and equal to almost 90 % of last year’s total sales.
Management’s newly issued fiscal 2026 outlook calls for $1.9 billion–$2 billion of revenue and $300 million–$320 million of adjusted EBITDA, with 70 % of the midpoint already under contract.
If those numbers hold, AeroVironment’s forward price‑to‑sales ratio shrinks from 9 to roughly 7, and the forward EV/EBITDA slides to the mid‑40s, still rich versus defense stalwarts, but suddenly reasonable for a company on track to double sales in 12 months.
Backlog Nobody Mentioning
Dig into that $726 million backlog and 52 % of FY 2025 revenue came from international buyers, and eight additional countries were negotiating Switchblade contracts at year‑end.
That spread matters because U.S. replenishment budgets for Ukraine have been lumpy and politically fraught, diversified demand cushions the risk.
Just as important, nearly a third of AeroVironment’s orders now originate from its new Space, Cyber, and Directed Energy segment, created when it closed the BlueHalo acquisition in May.
BlueHalo Deal Is Tranformative
The all‑stock, $4.1 billion purchase of privately held BlueHalo closed on May 1, 2025 . BlueHalo brings directed‑energy weapons, space sensors, advanced RF counter‑drone kits, and cyber‑hardening software, capabilities that push AeroVironment far beyond small unmanned aircraft.
On a pro‑forma basis the duo would have generated about $1.7 billion of fiscal 2025 sales. Management expects BlueHalo to contribute $700 million–$900 million of FY 2026 revenue and to lift consolidated gross margin into the 29 %–31 % range, a full five percentage points richer than the drone segment alone.
The consensus models that still treat AVAV as a pure‑play drone vendor are under‑counting both scale and margin expansion.
Pentagon Calalyst
Early in July the Defense Department quietly re‑wrote its acquisition playbook, reclassifying small Group 1 and 2 drones as “consumables”, commodities to be purchased like ammunition rather than aircraft.
That single memo slashes red tape and hands lower‑level commanders the authority to buy thousands of loitering munitions off the shelf.
For AeroVironment the timing is exquisite because its Switchblade family, already deployed by the U.S. Army and at least eight allied nations, sits in the sweet spot of the new classification. In effect, a process that once required a multi‑year program of record can now flow through a credit‑card‑sized procurement.
Analysts scrambling to revise demand models have barely finished writing the first drafts, which helps explain why the stock popped only briefly after the news.
Valuation vs Growth
Skeptics point out that AVAV’s forward P/E near 102 dwarfs the 17x earnings that Lockheed Martin commands .
True, but Lockheed is projected to grow revenue in the low single digits, while AeroVironment is guiding for 130 % top‑line growth this year.
A better yardstick is fellow small‑drone specialist Kratos, which trades at 45 times forward earnings and nearly 6x sales for an expected 20 % revenue bump.
Adjust for growth and AVAV’s PEG ratio lands near 0.8, well under Kratos’s mid‑thirties and even below Lockheed’s 1.6. Put differently, the market is paying less than one year’s growth for each point of projected expansion.
Hidden Assets On the Launchpad
Most investors know Switchblade, but few have heard of Red Dragon, a fully autonomous, GPS‑denied loitering munition unveiled last quarter that is ITAR‑free, meaning AeroVironment can sell it to allies without the usual U.S. export hurdles.
Likewise, its JUMP 20X tactical drone just won a $46 million initial order from Italy, validating the platform’s appeal in NATO markets.
And then there is the nascent directed‑energy portfolio, meaning BlueHalo’s compact microwave counter‑UAS cannon completed a successful live‑fire demo for the U.S. Navy in June, a data point buried in an appendix of the earnings deck that hasn’t made the rounds among analysts yet.
Management values that addressable market at $7 billion annually, none of which is in sell‑side models today.
Risk factors worth watching
AeroVironment’s multiples leave no room for execution stumbles. Integration hiccups with BlueHalo could sap margin gains, and a fiscal pivot in Washington could delay Pentagon orders even after the consumable re‑classification.
Supply‑chain disruptions—wildfires briefly crimped production last winter, driving a surprise third‑quarter loss remain a wildcard.
Finally, China’s rapid production of cheap FPV drones means price competition will eventually squeeze AeroVironment’s premium hardware.
A pure‑formula value screen won’t flag AVAV. But valuation is a function of cash‑flow timing, and the market is still discounting AeroVironment on last year’s numbers.
Layer in $1 billion‑plus of backlog, a policy tailwind that could make small drones as ubiquitous, and as frequently reordered, as artillery shells, and the high‑margin adjacencies unlocked by BlueHalo, and the picture shifts.
On projected FY 2027 earnings of roughly $5 a share (management’s midpoint implies that run‑rate), the stock trades near 54 times earnings.
If revenue lands at $2 billion next year, the forward EV/sales drops near 7, in line with high‑growth software primes and well below the teens where many aerospace disruptors priced in earlier cycles.
So is AeroVironment undervalued?
If you’re benchmarking against slow‑growth defense names, probably not. But if you’re pricing a company that is on the cusp of doubling its top line, expanding margins, and tapping a newly friction‑free procurement pipeline, today’s quote looks more like a launchpad than a landing zone.
Long‑term investors willing to stomach volatility may find that the market is still looking in the rear‑view mirror while AeroVironment’s drones, and its share price, have already taken flight.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.