Key Points
The Pentagon’s prioritization of U.S. drone development is a potential catalyst for drone makers such as AeroVironment.
Investors should be mindful of AeroVironment’s valuation, and shouldn’t feel rushed to buy when the stock is surging.
10 stocks we like better than AeroVironment ›
The Pentagon is doubling down on drone procurement, and one of its biggest drone vendors is trading higher as a result.
Shares of AeroVironment (NASDAQ: AVAV) were trading up 9.2% as of 12:01 p.m. ET Friday after Defense Secretary Pete Hegseth on Thursday afternoon issued new orders to his department that are intended to fast-track U.S. drone production and deployment.
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Image source: AeroVironment.
Moving mainstream
AeroVironment makes mostly small to mid-sized unmanned aerial vehicles (UAVs), or drones, primarily for military applications. The company has become a prominent defense contractor over the course of the war in Ukraine, where its drones have been a key part of U.S. assistance packages and have proven their worth in combat.
On Thursday, Hegseth said the U.S. needed to prioritize UAV development to keep pace with Russia and China. In a pair of memos, the Pentagon issued new policies allowing lower-ranked commanders to independently procure and test drones, and to operate and test them without significant restrictions.
The memo, while not specific to AeroVironment, continues the U.S. military’s theme of investing in small drones instead of higher-end aircraft. That should create more opportunities for the company and its peers.
Is AeroVironment stock a buy?
It’s worth noting that the memos focus mostly on innovation in small drones, and there is a risk that democratizing the procurement process could work against AeroVironment — at least in the near term — by widening the ability of military units to get drones from other sources that were previously unavailable to them.
But the overall trend is clear, and AeroVironment does stand to be a significant beneficiary. The company is well on its way to expanding its portfolio after acquiring BlueHalo earlier this year to build out its mid-sized drone and aquatic drone capabilities.
Shares of AeroVironment are up by more than 200% in the last five years, and trading now at more than 100 times earnings. That valuation means the market has already priced a lot of expected growth into the stock. The company is set up well to justify that optimism, but investors should avoid chasing a rally and buying in on Friday’s surge.
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Lou Whiteman 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.
