What happened

The U.S. Army has narrowed its list of potential vendors for its Future Tactical Uncrewed Aircraft Systems (FTUAS) program, and it appears AeroVironment (AVAV 2.26%) didn't make the cut. Investors are disappointed with the outcome, sending shares down as much as 19% on Thursday.

So what

AeroVironment makes small- to mid-size unmanned aerial vehicles (UAVs) -- or drones -- primarily for military customers, including some that are small enough to be carried into battle on a soldier's back. The company's systems are a big part of the United States aid package to Ukraine, helping to raise the company's profile and give its products more credibility with defense forces.

The company's plan for growth includes expanding into larger, more lucrative UAVs, and it is battling other defense contractors for a number of opportunities to expand.

The Army's FTUAS program is one such competition. In February, AeroVironment was selected along with Northrop Grumman, Textron, Griffon Aerospace, and Sierra Nevada to participate in an effort to replace the Textron-made Shadow reconnaissance and targeting drone. Each contractor was awarded between $1 million and $25 million to put together proposals for a new UAV.

On Wednesday, the Army said it had exercised the option for four of those five vendors. AeroVironment was not part of the announcement, implying it is out of the running for the FTUAS award.

Now what

This is certainly a setback, but the market appears to be overreacting to the news.

Yes, FTUAS was a big opportunity for AeroVironment. And some investors believed the company had a leg up on the competition because the Army in 2022 had awarded $8 million to provide AeroVironment's Jump 20 system as an interim Shadow replacement for one brigade. The Jump 20 is also one of the systems that has been sent to Ukraine.

AeroVironment acquired Jump 20's developer, Arcturus, in 2021 with just these sorts of competitions in mind.

As the war in Ukraine has demonstrated, UAVs are an important and growing weapon on the modern battlefield. There are plenty of competitions ahead, and AeroVironment has established itself as a trusted partner that will get a seat at the table as opportunities arrive.

For now, AeroVironment, for all of its growth, remains a young and volatile stock by defense standards. Investors are getting a reminder of that volatility today.