Despite a lackluster performance by the underlying stock, AeroVironment Inc. (NASDAQ:AVAV) faces robust military demand for its Switchblade series, landing some major contracts to expand its backlog. By the end of the first quarter fiscal 2027, the company reported $1.5 billion in funded backlog in addition to roughly $1.4 billion of unfunded backlog. The stock has plunged 41.78% on year-to-date basis and 60.91% over the past 52 weeks, after closing at $140.82 on October 2.
AeroVironment’s just landed a $464.8 million laser contract, but what does it actually change for AVAV’s growth story?
Photo by Thisisengineering Raeng on Unsplash
Profitability Remains the Core Problem
The company currently stands as a key player across the drones and loitering munitions segment. However, the profitability metrics do not inspire confidence. The drone and defense systems manufacturer has delivered -2.3% operating margin and -10.1% net margin over the prior twelve months. Core operational losses have resulted in -4.60% return on equity, after posting GAAP diluted loss of $0.10 per share during the first quarter of fiscal 2027. Positive operating cash flows of $58.82 million during the last twelve months offer a bright spot, including $13.5 million during the recently reported quarter. But the trailing levered free cash flows still remain within the negative territory at -$25.92 million.
Management has upheld its fiscal 2027 outlook, with a revenue guidance between $2.125 billion and $2.225 billion. The adjusted EBITDA projections range from $305 million to $325 million, indicating management’s confidence in executing its production and delivery schedules. Going forward, capacity expansions and sourcing efficiencies would enable the company to achieve higher backlog conversion.
Investors should also pay attention to this aerospace and defense giant that is expanding its aftermarket opportunity.
Order Strength Yet Modest Topline Growth
Aerovironment has generated $2 billion in revenue on a trailing twelve-month basis with the Q1 fiscal 2027 topline expanding by 5.70% year-over-year. Given the above-mentioned profitability challenges, one could take some encouragement from these figures, Yet, such a growth appears thin for a business carrying $7.92 billion market capitalization. The stock currently trades at around 4x its trailing sales, which shows that investors are still paying a premium for a business that is expanding at a slow pace and has not turned profitable. This explains why the stock has de-rated so sharply.
It recently secured a milestone contract associated with the Enduring High Energy Laser (E-HEL) program. The $464.8 million award was the first production contract for directed energy systems in U.S. military history. As part of the agreement, the company will deliver dozens of LOCUST X3 laser weapon systems over the next few years, which reflects on a notable transition from prototype testing to full-scale manufacturing.
AeroVironment has a $1.5 Billion Funded Backlog, but can it turn that demand into profits fast enough?
Institutional Sentiment
Based on data tracked across 1,000+ hedge funds by Insider Monkey, institutional sentiment toward AeroVironment remains strong, as the number of smart-money managers with long-term exposure in the stock has been going up. A total of 44 hedge funds held positions by the end of Q2 2026, compared to 37 in Q1 2026.
BlackRock is the largest institutional stakeholder, as per Yahoo Finance database, holding 3.48 million shares as of June 30. This amounts to 6.85% of outstanding shares. Other notable institutional investors include State Street Corporation and Vanguard Capital Management holding 4.31% and 3.24% of outstanding shares respectively.
Bottom Line
The underlying metrics suggest that the company is undergoing a transition. Revenue base is sizable and expanding, and leverage is moderate. However, what adds to investor concerns are the negative margins, negative returns on equity, negative free cash flow, which most likely explain the rationale behind a steep price decline. Short interest also signals skepticism within the investor base, who appear to have lost patience with the earnings picture.
A meaningful short float of 11.76% shows a sizable amount of investors betting on further dip in share price. However, a low short ratio of 2.11 suggests a potential squeeze would be less detrimental compared to other heavily shorted names, since shorts could exit with sufficient liquidity. Given the still-negative GAAP profitability and free cash flow, the numbers currently favor waiting for clearer evidence of sustained profitability despite the strong backlog.
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