Why Shares of AeroVironment Got Crushed Last Week

AeroVironment (NASDAQ: AVAV) stock took a tumble on Jan. 16. After closing above $392 a share ahead of the holiday weekend, AeroVironment stock returned to market on Tuesday and promptly plunged 16%. Shares of the military drones manufacturer kept on sliding all week long, finally ending the week below $308 a share -- a total of 21.7% lost in just four trading days! (as of midday Monday, it was down almost 23%)

So... what happened to AeroVironment stock last week?

You may be surprised to learn it had nothing to do with drones.

Image source: AeroVironment.

AeroVironment's no good, very bad, horrible, terrible Tuesday

Going back to work after a long weekend is rarely fun, and AeroVironment management had a worse-than-usual surprise waiting when it returned to the office on Tuesday. As AeroVironment disclosed in an 8-K filing with the SEC, the U.S. government "issued a stop work order on the Company's Other Transaction Agreement for the delivery of BADGER phased array antenna systems to support the Satellite Communication Augmentation Resource ('SCAR') program."

What's a "BADGER phased array antenna system," you ask?

Basically, it's a radar transmitter and receiver used to track and control satellites in orbit. AeroVironment ballyhooed its BADGER contract win last September, issuing a big press release describing how the U.S. Space Force Space Rapid Capabilities Office hired it to produce BADGER. AeroVironment predicted it would "deliver the first BADGER unit to the Space Force in the coming months," and deliver multiple units in early 2026.

Now it looks like that might not happen.

What does this mean for AeroVironment?

In its SEC filing, AeroVironment put the best face it could on the development. (It conspicuously did not issue a public press release.)

Management observed that "the stop work order allows for the parties to negotiate an amended agreement for the future." (So BADGER might not be a total loss.) However, even if the contract is allowed to continue, AeroVironment predicts it will have to agree to a "firm-fixed price agreement" for BADGER.

What does this mean for AeroVironment? The switch to a fixed-price contract implies BADGER was originally something else -- probably a cost-plus contract in which AeroVironment is guaranteed a certain level of profit on top of its costs. If BADGER becomes fixed-price, in contrast, the company will not be guaranteed a profit.

Indeed, if AeroVironment suffers cost overruns building BADGER, AeroVironment might need to eat those costs and incur a loss.

Is AeroVironment stock a buy?

AeroVironment's stock was very expensive before the bad BADGER news. After the news (and after the sell-off), AeroVironment stock remains overpriced.

AeroVironment reported $70 million in net losses over the last 12 months, and burned through $240 million in negative free cash flow (FCF). Wall Street analysts polled by S&P Global Market Intelligence forecast AeroVironment will return to positive FCF by the end of this year -- but still lose money -- before turning both profitable and FCF-positive again next fiscal year.

Unfortunately, the $2.39 in profit per share they forecast for next year values the stock at nearly 130 times forward earnings. Suffice it to say that's a lot to pay for a defense stock expected to grow earnings at only 20% annually over the next five years. To me, that makes AeroVironment stock a sell.

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.