AVAV is not a buy due to lack of consistent profitability and high valuation relative to growth.

There's no question that drones are a huge part of the future whether you're looking at commercial operations or the military and one of the leaders in the drone space is Aervironment.

The company reported earnings after the market closed yesterday and shares popped this morning. So I think it's worth digging into what we learned about the company, what revenue growth looks like, margins are something that I think we need to keep an eye on and then also that backlog and what the future looks like.

Before we get to the numbers at Arrow Environment, I did want to highlight what the year has looked like. This is a company that continues to grow, but the stock is down tremendously, 41% year-to date.

And if we we look at the draw down just from earlier this year, it's at about 62%.

And the big piece that I looked at when we looked at earnings is their revenue growth. revenue growth of 6% year-over-year. This is a company that was growing significantly more than that a year ago.

Now, the backlog was up 37% year-over-year. So, there is some positive things there, but this company is not growing and not growing profitably the way that investors were expecting not too long ago.

And we may not have the tailwinds in the future that we've had in the past from Ukraine, for example, and from the conflict or war in Iran. So, those may have been temporary tailwinds behind the company.

I mentioned that 6% revenue growth up to $480 million for the quarter. And this is fiscal first quarter of fis or fiscal 2027. A gap gross margin. I think this is something to keep an eye on.

There was an increase year-over-year, but you're still looking at a gap gross margin just over 25%. So, not great margins for this company's products.

And the big thing to look at here is that that means that the profitability is not what you may expect.

These are non-GAAP numbers. I'll get to the gap numbers in just a moment, but $53.4 million in non-GAAP adjusted IBITA. And then earnings per share 59. And again, that's on a non-GAAP basis.

Funded backlog up to $1.5 billion and unfunded up to 1.4 billion. Now, one of the things you see here is just the lumpiness in the business. And you can see that revenue is kind of all over the place over the past year.

And that's going to be the case. It's going to depend on what the orders are for the company's products and drones. So that's going to make it a little bit difficult to see that growth be consistent quarter over quarter, year-over-year.

There's also going to be lumpiness in what's growing. So you can look at the uncrrewed aircraft systems, UAS, that was up from 70 million a year ago to 120 million in the quarter.

Their prec precision strike and defense systems not up nearly as much about 8% year-over-year. So in total that's 21% growth because the smaller segment is those uncrrewed aircraft systems.

space and direct energy and cyber and mission solutions both declined in the quarter. So that was the downside for the quarter. That's what how you get to that combined total of 6% growth.

And guidance, this is not a super high growth company. The annual guidance kind of takes out that quartertoquarter variability, but you're still looking at about 10% growth for the fiscal year at the midpoint with their guidance of 2.1 to $2.2 billion, just over that on both the high and the low end of that range.

in the adjusted IBITA uh 305 to 325 non-GAAP earnings per share and remember this is non-GAAP 302 to 334. So that means that with shares trading for just over $150 per share as I'm recording shares are trading for a little less than 50 times expected earnings for fiscal 2027.

So a very expensive stock and that's why that growth rate is 6%.

Even if that's there's a little bit of variability and we're we are going to be maybe slightly into the double digits, this is a pretty expensive stock for the growth that they're actually demonstrating. That's why the stock is down 62% from its high.

Now, they are getting some nice award wins. So, this is going to add to that backlog. That's that backlog growth that I talked about earlier.

But the bigger challenge that I see is that the company is just simply not profitable on a consistent basis. In orange, we have the operating profit for Aero Environment. And you can see there was a couple of quarters here where the company was profitable, but going back to the January 2026 quarter, uh, lost $270 million in operating profit.

Obviously, some one-time events there. There was also a $10.9 million operating loss in the quarter.

Management called out some intangible costs. Those are non-cash costs, but those are very real costs for the business. So, this is the challenge. Yes, the company is growing. I think these are the kind of products that you want to invest in as an investor.

But Avironment has not proven the ability to be consistently profitable and that is the real challenge for the company.

So when you look at Aero Environment stock and the reaction from the market today, you're looking at shares that are trading for about four times sales. That's not all that crazy for a company that should have a pretty consistent business going forward, but almost 40 50 times forward earnings estimates.

And by the way, those are non-GAAP earnings estimates. It's very possible that we see GAAP results be at or below break even.

So the real challenge for air environment investors today is what's that market sentiment going to be like? When drones are really popular and it seems like that's going to be a huge growth industry long term, then the stock can do really well. But the fundamentals don't really back that up.

And that's the reason that I'm not buying shares after this earnings announcement. I think the pressure that we've seen on the stock, it is really the fundamental driver. It's because Aero Environment has not proven the ability to be profitable long term despite being in a really good segment producing the right kinds of products, but they're not a platform.

They don't have a diverse enough product line to be a huge supplier to the military or to commercial operators.

So, this is a tough position for Aero Environment. Despite the fact that it's actually been a really solid performer over the past decade, this is not a stock that I think is a great buy today.