Does Russia's New Drone Pose a Threat to AeroVironment's Switchblade?

AeroVironment's (AVAV 2.48%) Switchblade drone is exploding in popularity.

Since its introduction more than a decade ago as a mere mention in a post-earnings conference call, sales of AeroVironment's kamikaze drone have soared to the point where this single product now accounts for roughly 24% of all the revenue AeroVironment books in a year, the company says.  That works out to about $65 million, according to data from S&P Global Market Intelligence. The problem is that such success tends to attract imitators, and this is now the case with Switchblade.

Kalashnikov takes aim at foreign markets that AeroVironment can't sell to. Image source: Kalashnikov.

What is the Switchblade?

The Switchblade is an unmanned aerial vehicle -- but it's also kind of a guided missile. Small enough to carry around in a backpack, the Switchblade launches from a tube like a bazooka, then extends its wings and flies like a drone, guided remotely by an operator on the ground viewing the world through onboard optics. Upon spotting a target, the operator can observe it remotely, or guide the Switchblade in toward the target and detonate a small warhead contained in the drone's nose cone, destroying the target on impact.

Simple, right? Perhaps this simplicity of concept is what has inspired Russia's Kalashnikov, famed for its manufacture of the simple-yet-effective AK-47 assault rifle, to design an imitator to Switchblade.

Unveiled recently at the International Defence Exhibition & Conference in Abu Dhabi, Kalashnikov's "KUB-UAV" claims a top speed of 130 kilometers per hour (70 knots) and an aerial endurance (time the drone can remain airborne) of 30 minutes. A press release quoting Sergei Chemezov, the general director of Russian state-owned arms manufacturer Rostec (which controls Kalashnikov), highlights KUB-UAV's "silence" and "ease of use" as major selling points -- much as AeroVironment advertises the Switchblade as operating on "quiet electric propulsion" and "reduc[ed] level of training required" to use the weapon.

Check out the latest earnings call transcript for AeroVironment.

The KUB-UAV is said to be capable of carrying payloads (i.e., bombs) weighing up to three kilograms, but Rostec has not divulged the weight of the weapon itself, nor the weapon's range or flight ceiling. The KUB-UAV is, however, described as measuring 48 x 37 x 6.5 inches. This makes it more than twice as big as AeroVironment's Switchblade, which is only two feet in length, and narrowly cylindrical, prepackaged in its launch tube.

Here's how the stats that have been published compare:

*AeroVironment describes the Switchblade as being available "with 15 km-45 km options."

Neither AeroVironment nor Rostec/Kalashnikov publishes prices for their kamikaze drones, but a review of published contracts awarded to AeroVironment by the Pentagon suggests the average cost of a Switchblade drone is approximately $70,000. In contrast, The Washington Post quotes Kalashnikov representatives saying that the KUB-UAV will be "very cheap."

What it means to investors

That line may cause investors in AeroVironment stock some concern. After all, even if the KUB-UAV appears to be slower, bulkier, and less transportable than the Switchblade, the more AeroVironment comes to depend on Switchblade to power its sales, the more vulnerable the company's revenue stream will become to competition for those sales.

That said, there's no need for immediate concern. Here's why: Current U.S. law restricts the countries to which AeroVironment may sell the Switchblade, and at present it appears that the vast majority of Switchblade revenue has come from sales to the U.S. Pentagon itself. Outside the U.S., the Switchblade is available to only "a small circle of close allies," reports the Post, which suggests that for the time being, AeroVironment probably isn't very dependent upon international sales of the Switchblade at all.

It's non-U.S. allies to which Rostec and Kalashnikov can be expected to most actively market their KUB-UAV -- "smaller armies" that might want to buy the Switchblade but can't, and that perhaps couldn't afford to buy it even if they were permitted to. This being the case, I'd say the KUB-UAV poses more of a threat to AeroVironment's ability to grow Switchblade sales internationally at some indefinite time in the future, if and when it becomes permissible to make those sales.

Since that day may never come, I honestly don't see the KUB-UAV impacting AeroVironment's business much at all.