AeroVironment Stock: Buy, Sell, or Hold?

It's been a banner year for defense contractor AeroVironment (NASDAQ: AVAV), which posted record sales and profitability. At the time of this writing, the stock is up 57% in 2024 with the market cheering the strong demand for the company's lineup of high-tech warfare systems.

On the other hand, a backdrop of high expectations against a lofty valuation has added a layer of uncertainty for investors to think about. Despite the big rally this year, shares have been volatile in a tight trading range over the last several months.

Let's discuss what to do with AeroVironment stock.

Reasons to buy AeroVironment stock

AeroVironment is recognized for its unmanned aircraft systems (UAS), which are automated or remote-controlled reconnaissance drones. The company's product portfolio extends to robotic ground vehicles specialized for dangerous applications along with related control hardware and software solutions.

A big success for the company in recent years has been its loitering munition systems (LMS), often called "kamikaze drones" because they are mobile missiles intended to fly directly into a combat target and detonate its onboard warhead. The Switchblade device has proven highly capable in Ukraine, drawing interest from the U.S. Department of Defense and global allied forces.

The impact is evident through very impressive growth. In the latest reported period -- fiscal 2025 first quarter, ended July 27 -- revenue climbed by 24% year over year with LMS leading growth, as sales increased 68% from the prior-year quarter.

Image source: Getty Images.

Management is projecting optimism for the momentum to continue, pointing to a robust order backlog of $372 million. In August, AeroVironment secured a new five-year Indefinite Delivery, Indefinite Quantity (IDIQ) contract award with the U.S. Army to supply Switchblade systems in a deal that has a $990 million value ceiling. As that program pipeline is funded, orders will work to build up the company's backlog, highlighting the operating and financial runway.

For 2025, AeroVironment is forecasting annual revenue growth of 10% to 14% while its non-GAAP diluted earnings per share (EPS) target range is $3.18 to $3.49 -- a 12% increase at the midpoint from the $2.99 last year. Investors confident in the company's long-term prospects have plenty of reasons to buy or hold AeroVironment stock which is supported by overall solid fundamentals.

Data source: AeroVironment. YOY = year over year.

Reasons to sell shares of AeroVironment

There's a lot to like about AeroVironment, which has carved out a leadership position in the UAS and loitering munitions categories of defense technology. That being said, the company's growth tailwinds from conflicts in Eastern Europe and the Middle East are hardly a secret in the market. Investors have bid up the stock over the past year, pricing its strong outlook to an objectively expensive valuation.

The challenge now is that the stock is trading at 58 times its full-year consensus EPS as a forward price-to-earnings (P/E) ratio. This level is well above the defense industry average from defense peers like Northrop Grumman, L3Harris Technologies, Lockheed Martin, and RTX, which have an average earnings multiple closer to 20. While this metric alone doesn't mean the stock is materially overvalued or will need to crash anytime soon, it does warrant some caution for investors looking for much more upside in the near term.

The exceptional fiscal 2024 for AeroVironment, when revenue climbed by 33% and EPS more than doubled, left the company with a tough act to follow. A high baseline of expectations makes it more difficult for the company to keep surprising the market. Investors who believe AeroVironment is past its peak growth, or see headwinds in the demand for its LMS could consider selling the stock.

AVAV PE Ratio (Forward) data by YCharts

Decision time for AeroVironment stock

I believe AeroVironment is a good business with a positive long-term outlook, which means the prudent move for current shareholders is to hold and ride out any short-term volatility.

At the same time, I'd also suggest investors thinking about buying the stock today instead look for more attractive opportunities elsewhere in the market. AeroVironment's premium valuation and questions about how the evolving geopolitical conflicts can impact its business are enough to keep me on the sidelines.

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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AeroVironment. The Motley Fool has a disclosure policy.