What happened

Shares of AeroVironment (NASDAQ:AVAV) closed up 9.8% on Thursday after the drone maker received an analyst upgrade following a strong quarter. The stock is up 27% year to date, but Wall Street believes there is further room to soar.

So what

AeroVironment makes small drones and tactical missile systems for government and commercial customers. Earlier in the week, the company delivered better-than-expected fiscal fourth-quarter earnings, and Wall Street has taken notice. The company was upgraded to a buy from a hold by Stifel on Thursday, with the price target jumping to $90 from $55.

An AeroVironment Switchblade drone.

Image source: AeroVironment.

Stifel analyst Joseph DeNardi in the upgrade noted that the company is experiencing strong demand for its existing portfolio of products and said AeroVironment's initial fiscal 2021 guidance was ahead of analyst expectations. AeroVironment, according to DeNardi, is "in a favorable position given strong demand for its existing portfolio and a full pipeline of new capabilities."

A lot of the excitement about AeroVironment centers on its May win of a $146 million U.S. Army contract for its Switchblade "loitering missile system," the largest single contract in the company's history. The win was not part of AeroVironment's guidance, so analysts are now resetting expectations that had taken that win into account.

Now what

AeroVironment shares are not cheap, trading at 42 times forward earnings projections and more than five times sales. But the company, and in particular its defense business, is on a good run and, as Stifel notes, has a good pipeline to use to grow earnings.

The stock has been volatile over the years, so I'd be careful chasing the rally. But there's a lot to like about the underlying business, and AeroVironment stock doesn't appear likely to crash back down to earth anytime soon.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.