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Key Points
- AeroVironment stock has dropped roughly 15% in 30 days and trails the SPDR S&P Aerospace & Defense ETF by a wide margin, even as defense spending tailwinds accelerate.
- Revenue through the first half of fiscal 2026 surged 145% year over year, and the company posted a record $3.5 billion in quarterly contract awards.
- Adjusted gross margins fell to 27% from 41% a year ago, and the margin recovery timeline is the key variable heading into March 3 earnings.
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Many aerospace stocks are outperforming the S&P 500 nearly two months into 2026. That’s based on the performance of the SPDR S&P Aerospace & Defense ETF (NYSEARCA: XAR). The fund is up about 16.2% whereas the S&P is up just over 1%.
That makes AeroVironment Inc. (NASDAQ: AVAV) a laggard in the sector. AVAV stock is “only” up about 5.5% in 2026. However, that's due to a brutal selloff over the past month.
What may be more concerning is that the XAR is up by more than 22% over the last three months, while AVAV stock is down by more than 8% over the same period. That’s what investors are weighing as AeroVironment prepares to report earnings on March 3.
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Growing in a High-Growth Sector
Most of the proposals investors hear in the annual State of the Union address fall into the category of lofty rhetoric. They may sound good at the moment, depending on one’s perspective, but history shows they don't usually get off the ground. And even if they do, the finished product looks like a poor facsimile of the initial proposal.
Here’s how that relates to AeroVironment. The company specializes in three specific categories:
- Unmanned Aerial Systems (UAS)
- Tactical missiles and precision loitering munitions
- Electric vehicle charging and scalable energy systems
The common thread connecting these categories is that they are all part of the “next generation” defense technologies that the Trump administration is proposing to spend up to $1 trillion to rebuild the United States’ defense capabilities.
That commitment has shown up in the company’s revenue numbers in the past year. Through the first two quarters of AeroVironment’s 2026 fiscal year, the company’s revenue is up 145% year-over-year (YOY).
Furthermore, in its Q2 fiscal year (FY2026) earnings report, AeroVironment guided to full-year revenue between $1.95 billion and $2 billion. That would more than double the first half numbers. The strong revenue numbers were driven by strong demand for the company’s drone and precision strike products. AeroVironment also set an all-time record with $3.5 billion in contract awards during the quarter.
Plus, those numbers don’t address the very real elephant in the room. That being the potential, and some would say likelihood, that the United States will take some sort of military action in Iran. Such a move would likely employ products and services from AeroVironment.
Can Earnings and Margins Catch Up?
The question about AVAV stock, as with many growth stocks, comes down to valuation. Specifically, when will AeroVironment’s strong topline growth begin showing up in earnings?
Adjusted gross margins fell to 27%, down sharply from 41% in the same quarter last year. Three things drove this. First, the company went live with a major new Oracle financial software system mid-quarter, which created one-time inefficiencies and extra costs. Second, its revenue mix has shifted toward lower-margin services following the BlueHalo acquisition. Third, a prolonged U.S. government shutdown delayed product shipment, including some international sales, which hurt the higher-margin product side of the business.
Management is optimistic that the margin story will improve. Specifically, the company expects margins to recover into the high 30% range by Q4. The company cites a ramp-up in product revenues, stability in its software transition, and revenue from pent-up government orders starting to flow through.
If the company’s margin outlook is accurate, it would support the current analysts’ forecast for about 31% earnings growth in the next 12 months. That would go a long way towards justifying the company’s current valuation of around 15x sales.
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Bullish Sentiment Could Signal an Earnings Beat
AeroVironment is covered by 23 analysts and has a consensus rating of Moderate Buy, with 20 of the 23 analysts rating the stock Buy. Adding to the bullish sentiment is the consensus price target of $367, which would be a 42% gain from the AVAV stock price as of this writing. Institutional buying also outweighs selling by almost a 2:1 margin in the last 12 months.
That optimism may be tied to the company’s earnings outlook. The consensus forecast is for AeroVironment to generate adjusted EPS of 73 cents. The whisper number for AVAV stock is coming in at 66 cents, which means that some analysts believe the consensus number is about 10% too high.
However, even using the whisper number, earnings would show a gain of over 100% from the prior year. That YOY growth has been absent from the company’s reports in the first two quarters of the year.
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