What happened

Shares of AeroVironment (NASDAQ:AVAV) gained 32.1% in January, according to data provided by S&P Global Market Intelligence, with almost the entire gain coming during a single trading session. The drone maker made a move during the month to broaden its product portfolio, and investors applauded the action.

AVAV Chart

AVAV data by YCharts

So what

AeroVironment is primarily a manufacturer of small drones for the military. On Jan. 13, the company announced plans to acquire privately held Arcturus UAV for $405 million in cash and stock in an effort to expand the products it offers to the government.

Arcturus specializes in larger drones than the sometimes handheld models AeroVironment is known for. The target makes drones that fall into the under 55 pound and under 1,320-pound categories. AeroVironment in a statement said those categories represent about $1 billion in annual potential contracts.

AeroVironment's Puma drone in action.

Image source: AeroVironment.

"Together, we will offer an unmatched portfolio of multi-domain unmanned capabilities, supported by our ongoing investments in artificial intelligence and autonomy, to help our customers address a broad set of defense and commercial missions," AeroVironment CEO Wahid Nawabi said in a statement.

The deal is valued at about 11 times Arcturus' adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). AeroVironment said it expects the purchase to contribute to earnings immediately.

Now what

Wall Street loves this deal. Baird analyst Peter Arment upgraded AeroVironment to outperform from neutral after the announcement, saying the purchase would give the company a "highly profitable unmanned aircraft system portfolio" and the ability to boost its growth rate.

There's a lot to like, but there's also an argument to be made that after the dramatic jump in January the upside is now priced in. AeroVironment now trades at more than 60 times forward earnings, which is rich even if Arment is correct and the Arcturus deal does spark growth. I'd advise caution buying in right now.

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.