Why AeroVironment Stock Bounced Back Today

AeroVironment (NASDAQ: AVAV) stock slid nearly 2% Tuesday after the company announced plans to make a $4.1 billion acquisition in the defense industry. The stock is recovering a bit from those losses Wednesday, though, as investors rethink their initial skepticism about the deal.

As of 12:55 p.m. ET, the stock is up 3%.

AeroVironment's big deal

AeroVironment stock outperformed the S&P 500 over the past year, rising 49% in price. The stock currently boasts a $5.5 billion market capitalization -- which sounds like a lot, but here's the thing: The company AeroVironment is buying costs nearly as much as AeroVironment itself.

AeroVironment will pay $4.1 billion in stock to acquire BlueHalo, a five-year-old, private-equity-owned defense company, which operates on the "cutting edge" of such whiz-bang tech as "Space Technologies, Counter-Uncrewed Aircraft Systems (cUAS), Directed Energy, Electronic Warfare, Cyber, Artificial Intelligence and ... Uncrewed Underwater Vehicles (UUVs)."

AeroVironment calls these technologies "complementary" to its own specialization in military drones, and predicts merging the two defense companies will "drive agile innovation and deliver comprehensive, next-generation solutions designed to redefine the future of defense."

Does this deal make sense?

Whether or not this is how things work out, investors rebelled yesterday at the price AeroVironment is paying, and are only just getting used to the idea today. But is $4.1 billion too much to pay for BlueHalo?

It depends on how you look at it. Although much younger than 53-year-old AV, BlueHalo is arguably a more successful company than its acquirer. BlueHalo anticipates booking more than $900 million in revenue this year, versus AeroVironment's trailing revenue of $754 million. Valuation-wise, AitV will pay roughly 4.6 times 2024 sales for BlueHalo, which compares attractively to its own valuation of 7.3 times sales.

Viewed this way, AeroVironment seems to be getting a good deal. Of course, AeroVironment itself costs quite a lot for a defense contractor. The best I personally can say about the deal is that, while AeroVironment stock is too expensive, at least the price it's paying for BlueHalo is a little less extreme.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Nvidia: if you invested $1,000 when we doubled down in 2009, you’d have $381,173!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $43,232!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $469,895!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of November 18, 2024

Rich Smith 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.