Why AeroVironment Stock Crashed 16% This Morning

AeroVironment (NASDAQ: AVAV) stock tumbled 15.6% through 10:45 a.m. ET Thursday after reporting mixed Q3 earnings last night.

Heading into the report, analysts forecast AeroVironment would earn $0.68 per share on sales of $181.4 million. AeroVironment beat the sales forecast, reporting $188.5 million in quarterly revenue. However, EPS was barely two-thirds what were predicted: $0.47 per share.

AeroVironment's Q3 earnings

AeroVironment sales grew 4% to set a new quarterly record for the maker of small military drones. CEO Wahid Nawabi credited the popularity of the company's "loitering munition systems" (i.e., kamikaze drones) for the strong revenue performance, noting the company also grew its backlog of future business by 25% in the quarter.

The bad news is the profitability of these sales slumped, with AV's gross profit margin falling 300 basis points to 39%. Nawabi blamed higher loitering munitions sales for this.

The worse news is that, when earnings are calculated according to generally accepted accounting principles (GAAP), the damage was even greater. Turns out that AV's "$0.47" per-share profit, already less than Wall Street had hoped for, was only a pro forma number. Actual GAAP profits for the quarter amounted to only $0.27 per share -- a decline of 59% year over year, and the opposite of what you'd expect to see with sales rising.

This fact is presumably the big reason investors are selling off AV stock today.

Is AeroVironment stock a sell?

Turning to guidance, management said 2025 sales will land somewhere between $790 million and $820 million, meaning $805 million at the midpoint. That would work out to 12% year-over-year sales growth, which isn't bad, and better than AV accomplished in Q3.

Management didn't give a projection for GAAP profits, however, saying only that pro forma profit should land somewhere between $3.18 and $3.49 per share. At the midpoint ($3.33) that works out to about 11% growth year over year, and implies management will miss analyst earnings forecasts for $3.42.

So back-to-back earnings misses for AV stock? No wonder investors are upset.

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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.