AeroVironment's Wasp drone model. Image source: AeroVironment.

Drones have become increasingly important in a wide range of applications, and as the potential use of drones in military and commercial applications has risen, so too have the prospects for drone makers like AeroVironment (NASDAQ:AVAV). As the release of its fiscal second-quarter financial report approaches, AeroVironment investors have become increasingly concerned that rivals like Northrop Grumman (NYSE:NOC) could end up winning a larger share of the drone industry's overall future business than previously hoped. Let's take an early look at whether AeroVironment shareholders are right to be concerned and how the company has fared in the past few months.

Stats on AeroVironment

Analyst EPS Estimate

($0.09)

Year-Ago EPS

($0.13)

Revenue Estimate

$57.74 million

Change From Year-Ago Revenue

9.6%

Earnings Beats in Past 4 Quarters

2

Data source: Yahoo! Finance.

What's ahead for AeroVironment earnings?
In recent months, investors haven't looked favorably on the potential for AeroVironment earnings to grow. They've widened their loss estimates for the fiscal second quarter slightly, and they've wiped out their previous expectations for a modest profit for the full fiscal year. The stock has also struggled, falling 9% since mid-August.

AeroVironment's fiscal first-quarter earnings report was the primary cause of the stock's poor performance over the past few months. In the report, sales declined 9%, and the company lost twice as much money as investors had forecast. Even more troubling was the fact that revenue in the key unmanned aircraft systems division fell from the year-ago quarter, reversing a previous trend in which AeroVironment had consistently shown strength in the drone area even as its Efficient Energy Systems business has struggled. Backlogs rose, and management saw potential for future growth in several directions, but that wasn't enough to keep the stock from losing ground.

During the past quarter, AeroVironment has had to deal with additional challenges. In late September, the company issued a press release saying that it had lost a chance at a contract with the Defense Advanced Research Projects Agency to work on the Tactically Exploited Reconnaissance Node project. That leaves Northrop Grumman as the winner of the project, which could result in roughly $4.4 billion in revenue for the defense contractor. Even for the much larger Northrop Grumman, that's a substantial amount of sales growth. For AeroVironment, the lost opportunity means a lot more, given its smaller size.

Yet the future is starting to look brighter for AeroVironment. After years of dramatically limiting international sales of drone technology, the division in the Pentagon that's responsible for selling military equipment to foreign entities told Congress that it had approved a major arms sale to Italy. The sale of missiles, laser-guided bombs, and other weaponry led some to speculate that Italy would use it in part to weaponize some of the drones it currently has in its arsenal. AeroVironment has to hope that this represents a rising trend and that it will therefore be in a position to meet some of the expected increase in demand that would result. With geopolitical risk on the rise, military drones could become even more essential in the near future.

At the same time, AeroVironment is waiting for new regulations on the commercial use of drones. So far, regulation has been fairly lax, but the expected rise in use has led federal officials to look at additional rules. Even more onerous requirements might be a positive for AeroVironment, as it would at least define the way forward for commercial users to comply and use drones.

In the AeroVironment report, investors should watch closely for guidance on how well the company expects to do for the remainder of the fiscal year and beyond. Many of those following the stock believe that this could be the last quarter that it posts a quarterly loss. If conditions in the drone market keep improving, then the sky could be the limit for AeroVironment's long-term prospects.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends AeroVironment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.