Laser Weapons Are Real Now -- and You Can Invest in Them With AeroVironment Stock

For nearly as long as I've been writing for The Motley Fool, the U.S. Pentagon has wanted a laser gun. As far back as 2004, I wrote about a Northrop Grumman (NYSE: NOC) project to load a chemical oxygen iodine laser onto a Boeing (NYSE: BA) 747 and use it to shoot missiles out of the sky.

Nothing ever came of that particular project.

But something might come of this next one.

Image source: Getty Images.

Mass-market laser guns are a thing now

Earlier this month, defense company AeroVironment (NASDAQ: AVAV) -- best known as a manufacturer of military drones -- said that the U.S. Army is paying it $464.8 million to produce laser weapons under the Enduring-High Energy Laser (E-HEL) program.

Calling it a "landmark contract," the company, often referred to as AV, said that "this award represents the first-ever production contract for directed energy systems in United States history."

And it's true! Over the years, I've covered multiple contracts awarded to multiple defense contractors for laser weapons of all shapes, sizes, and acronyms: Lockheed Martin (NYSE: LMT) got the High Energy Laser Scaling Initiative (HELSI). Kratos Defense & Security (NASDAQ: KTOS) built the 30-kilowatt AN/SEQ-3 Laser Weapon System (LAWS). Northrop Grumman, recovering from its airborne laser fiasco, went on to win a contract to build a 150-kilowatt Laser Weapon System Demonstrator (LWSD).

Up to now, however, every laser weapons contract awarded has been for research and development, building and testing a few prototypes at a time. But AeroVironment's contract is for laser weapon production -- and that's something never before seen.

AV Chief Executive Officer Wahid Nawabi calls this "a defining moment not only for AV, but for the future of modern defense" and is promising to execute AV's contract to produce "scalable, modular, and cost-effective defense solutions," producing dozens of 30-kilowatt LOCUST X3 laser weapon systems during the next few years that are capable of taking down even half-ton Group 3 military drones.

How much does a laser gun cost?

Without a firm number on the number of lasers called for in the E-HEL contract, it's hard to say precisely how much the new counter-drone laser weapon will cost -- or how much money AeroVironment might end up making on this contract. But working off the assumption that if there were even just 200 weapons on order, AV would describe its contracted output in the "hundreds," not "dozens," let's pick a number out of a hat: 144 laser weapons -- or a dozen dozen.

If that's the right number, one might calculate that a single E-HEL laser might cost as little as $3.2 million compared to the cost of firing off two $2 million Patriot missiles to make sure of bringing down a drone. More important than the system cost, though, is the operating cost of E-HEL -- which military analysts put at just $1 per shot (for the cost of the energy to take the shot). A Patriot missile has no second-use option.

At that price, I expect E-HEL to become very popular with U.S. Army accountants -- and with the Navy, Marine Corps, and Air Force as well. And I expect the AeroVironment department responsible for building E-HEL to enjoy brisk business.

How did AeroVironment win the contract?

Speaking of which, AeroVironment probably deserves a round of applause for the decision to buy defense company Blue Halo for $4.1 billion last year. Now part of the drone company's new Space, Cyber, and Directed Energy (or SCDE) division, Blue Halo is almost certainly the AV division that will build the E-HEL.

Last year, SCDE contributed about $619 million to AV's roughly $2 billion in total revenue. As E-HEL production increases, expect SCDE to become an even bigger part of AV's business.

Is AeroVironment stock a buy?

That's the question that bugs me. Is AeroVironment stock a buy? Because, as optimistic as I am about the prospects for E-HEL laser weapons becoming a must-have item for the U.S. military -- especially in a time of rising threats from drones -- I'm still not convinced that this is a game changer for AeroVironment stock.

Last quarter, AV reported strong sales at its SCDE division -- $134.5 million. The division still wasn't profitable, reporting a $9 million loss based on earnings before interest, taxes, depreciation, and amortization (EBITDA). If laser weapons turn out to be higher-margin than SCDE's other products, that could change.

But if not, then this could turn out to be just another case of "great product, great company...lousy stock."

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AeroVironment, Boeing, Kratos Defense & Security Solutions, and Lockheed Martin. The Motley Fool has a disclosure policy.