Shares of tiny drone-maker AeroVironment (NASDAQ:AVAV) are on a tear.

After reporting earnings for its fiscal fourth quarter and full-year 2014 last night, AeroVironment (AeroVironment) shares took off on a 13% romp higher in early Wednesday trading. So what's all the fuss about? Let's find out.

In its fiscal fourth quarter, AeroVironment reported:

  • a 36% increase in revenue versus last year's Q4
  • only 19% growth in both cost of goods sold and selling, general, and administrative expenses
  • a 70% increase in gross profits
  • a more than 20-fold increase in operating profits

And reversing last year's quarterly loss, AeroVironment reported earning a cool $8 million in this year's Q4 ($0.35 per diluted share), helping to lift net profits for the year as a whole 28% over fiscal 2013 levels. When all was said and done, AeroVironment ended the year with $0.60 per share in net profit. As a result, at a share price of just under $35 today, the stock now costs about 58 times earnings.

58 times earnings? Isn't that a lot?
Actually, yes. It is a lot to pay, even for a company that just reported growing its profits-haul by 28%. And yet, AeroVironment's not quite as expensive as it looks. A close examination of the company's cash flow statement reveals that AeroVironment's free cash flow for fiscal 2014 grew 78% in comparison to 2013 levels. These cash profits were also more robust than the GAAP version of profitability, with AeroVironment raking in $21.7 million in free cash flow, versus reported net income of only $13.7 million.

So while looked at one way, AeroVironment stock seems very pricey indeed at 58 times earnings, viewed from the perspective of free cash flow, the stock's remarkable rise in value today may not be entirely unjustified. Valued on free cash flow, the stock now trades for a price to free cash flow ratio of just 36. And if you give AeroVironment credit for its sizable bank account ($167 million), the enterprise value to free cash flow ratio on this stock drops all the way down to just 28 -- which actually looks like a pretty reasonable valuation for a stock that just grew GAAP profits 28% year over year, let alone one that exploded its free cash flow intake by 78%.

What lies ahead
But can AeroVironment maintain this kind of growth going forward? That's the real question.

Looking ahead, AeroVironment CEO Tim Conver says he's "encouraged by market and customer trends," and feels that the company is "well positioned to lead market adoption and capitalize" on new opportunities in the drones market. (Such as this one, perhaps?)

That said, investors should probably begin preparing themselves for a marked deceleration in growth rate at AeroVironment. Funded backlog at the company is up only a modest 11% versus where AeroVironment was at one year ago, after all. This implies that near-term growth in sales will similarly fall in the low double digits. Even Conver says he foresees only about $250 million-$270 million in revenues for the new fiscal year -- suggesting a worst-case scenario of flat revenues year over year, and a best case of perhaps 8% growth. 

Long story short, I see room for optimism in AeroVironment's remarkable success in Q4. But a repeat looks unlikely, and with growth trends looking likely to slow, the stock is quite simply too expensive to buy today.