What happened
Drones made by AeroVironment (AVAV -0.20%) are getting significant use in the war in Europe, a sign that the company is on its way to fulfilling the promise investors have long seen in AeroVironment. The stock is moving higher as a result, with AeroVironment shares up more than 10% for the week as of mid-day Thursday.
So what
AeroVironment has long been viewed as one of the more speculative investments in the usually staid defense industry. The company makes a range of small-to-medium-sized unmanned aerial vehicles (UAVs) used for reconnaissance and weapon delivery. There's great potential in the tech but also a lot of competition. And AeroVironment has faced turbulence in trying to build its government sales.
Image source: Getty Images.
For example, the U.S. Army purchased no AeroVironment-made Switchblade UAVs in fiscal 2021 after purchasing $48 million worth in 2020 and $183 million worth in years prior.
But it appears the Switchblade is having its coming out party. The UAV, which the Army refers to as the Lethal Miniature Aerial Missile System (LMAMS), was among the products the White House announced it was sending to Ukraine back in March. Earlier this week, Bloomberg reported the Pentagon plans to order 10 additional Switchblades with an upgraded anti-tank warhead for delivery to the Ukrainians.
Investors have viewed the developments as positives for AeroVironment's relationship with the U.S. Defense Department, sending the shares up more than 70% since hostilities began.
Now what
The last few months have gone a long way toward eliminating any lingering doubts about the strength of AeroVironment's portfolio. UAVs will play a big part in future conflicts, and AeroVironment has firmly established its seat at the table as the Pentagon plans future buys.
That said, there is some risk here that investors are getting ahead of themselves. Military procurement can be slow and inconsistent, as evidenced by the Army's on-again, off-again pattern of buying Switchblades in recent years. Long-term investors are right to be excited, but be careful chasing this rally from here.
