Please ensure Javascript is enabled for purposes of website accessibility

Why AeroVironment Stock Fell Nearly 20% in October

By Lee Samaha – Nov 5, 2018 at 11:01AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The drone manufacturer's stock price came under pressure last month.

What happened

Shares in AeroVironment (AVAV 2.02%) dropped 19.8% in October according to data provided by S&P Global Market Intelligence. Given that there wasn't any significant event from a fundamental perspective in the month, it's fair to argue that the move is likely to be a consequence of the general market malaise in October.

Indeed, if you actually look at AeroVironment's stock performance since the day before the company's first-quarter 2019 results (on Sept. 5), the stock is actually up 6.8% compared to the S&P 500 index. The earnings were well received by the market, as the stock popped 17% on the news, so it doesn't look like there's any fundamental weakness in the business.

A military drone in flight.

Image source: Getty Images.

In fact, the earnings report showed a company more than doubling its backlog to $157 million, but considering that management expects $290 million to $310 of revenue in fiscal 2019, it's a good idea to keep an eye out for news.

For reference, the company announced a $5.9 million contract for unmanned aircraft systems (drones to you and me) in mid-September and a $13 million contract with the United States Air Force in October.

So what

Valuations do matter, and so do movements. Given any kind of general market correction, it's likely to be stocks like AeroVironment that get sold off the most. As you can see below, the company priced for growth, and when the market decides to take risk off the table, stocks like AeroVironment will get hit first.

AVAV EV to EBITDA (Forward) Chart

AVAV EV to EBITDA (Forward) data by YCharts.

That said, and as noted earlier, if the company's fundamentals are supportive of the idea that AeroVironment can generate long-term growth from sales of its unmanned aircraft systems and tactical missile systems, shareholders are likely to be rewarded.

Now what

Investors who believe in the long-term growth potential of the business will shrug off the volatility and focus on sales of the company's drones to the military. Meanwhile, the company has the opportunity to use military technology in commercial applications.

On the other hand, the decline in October is a salutary lesson in what happens when the market takes risk off the table, and as a consequence, it makes sense to only buy/hold the stock if you are prepared to stomach market volatility.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends AeroVironment. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

AeroVironment, Inc. Stock Quote
AeroVironment, Inc.
AVAV
$86.97 (2.02%) $1.72

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
339%
 
S&P 500 Returns
108%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.