AeroVironment's Strategic Position in the $1.5 Trillion Defense Budget Expansion: Assessing Undervaluation and Long-Term Growth Potential

The U.S. defense sector is undergoing a seismic shift, driven by a proposed $1.5 trillion budget for 2027-a stark contrast to the current 2026 allocation of $901 billion. This surge in spending reflects a strategic pivot toward modernization, with a particular emphasis on unmanned systems, attritable mass technologies, and artificial intelligence (AI). Amid this transformation, AeroVironment (AVAV) stands out as a key beneficiary, leveraging its expertise in drones, counter-UAS systems, and autonomous platforms to secure a commanding position in a rapidly expanding market. However, its valuation metrics-while elevated-raise critical questions about whether the stock is overpriced or undervalued relative to its growth trajectory.

Valuation Metrics: A Tale of High Multiples and Growth Expectations

AeroVironment's current price-to-earnings (P/E) ratio of 97.13 as of April 2025 appears starkly inflated compared to defense sector peers such as Textron (19.38), Northrop Grumman (21.95), and General Dynamics (22.8). Similarly, its enterprise value-to-EBITDA (EV/EBITDA) ratio of 92.92 dwarfs industry averages, where companies like Lockheed Martin and Huntington Ingalls Industries trade below 30. These metrics suggest AVAV is priced at a premium, a reflection of its high-growth profile.

Yet, the absence of a reliable PEG ratio-due to inconsistent earnings data-complicates the analysis. What is clear, however, is that AVAV's earnings are projected to grow at a robust 24.21% annually, outpacing the defense sector's average PEG ratio of 2.12. This discrepancy implies that while AVAV's valuation appears lofty, its growth potential may justify the premium. The key question is whether the market is overestimating its future earnings or underestimating the durability of its competitive advantages.

Contract Wins and Strategic Alignment with Defense Priorities

AVAV's recent contract wins underscore its alignment with the U.S. Department of Defense's (DoD) modernization agenda. In 2025 alone, the company secured an $887 million contract with the U.S. Army for unmanned aircraft and counter-drone systems and a $4.8 million deal with the U.S. Coast Guard for remotely operated vehicles (ROVs) under its VideoRay subsidiary. According to federal defense spending reports, these contracts are not isolated successes but part of a broader trend: the DoD has allocated $1.3 billion to unmanned systems for 2025, with the 2027 budget proposal further amplifying this focus.

AVAV's technological edge is evident in its leadership in attritable mass systems-low-cost, high-performance platforms designed for rapid deployment. Its P550 uncrewed aircraft and collaboration with DARPA on the Wildcat UAS program highlight its innovation in autonomous technologies. Additionally, the company's acquisition of BlueHalo has expanded its capabilities into space-based and directed energy systems, positioning it to capitalize on the DoD's push for multi-domain dominance.

Long-Term Growth Drivers: Budget Expansion and Market Dynamics

The proposed $1.5 trillion defense budget for 2027 is more than a fiscal adjustment; it is a strategic reorientation toward countering emerging threats through advanced technologies. This shift aligns with AVAV's core competencies, particularly in AI integration and attritable systems. For instance, the company's JLTV-mounted LOCUST laser weapon systems, delivered to the U.S. Army, exemplify its ability to merge cutting-edge hardware with AI-driven capabilities.

Moreover, AVAV's financial performance reinforces its growth narrative. A 151% revenue increase in Q2 2025 and a book-to-bill ratio of 2.9 signal strong demand and operational momentum. Analysts project revenue of $2.6 billion by 2028, driven by sustained contract wins and the scalability of its platforms. However, this optimism hinges on the stability of defense budgets-a variable that remains subject to political and economic shifts.

Balancing Risks and Rewards

While AVAV's strategic positioning and growth prospects are compelling, its valuation metrics demand scrutiny. A P/E ratio of 97.13 and EV/EBITDA of 92.92 suggest the stock is trading at a significant discount to its historical averages (10-year P/E: 131.51; 5-year P/E: 308.95). This apparent undervaluation relative to its past performance could indicate either a correction in investor sentiment or a mispricing of its future potential.

The defense sector's average PEG ratio of 2.12 provides a useful benchmark. If AVAV's 24.21% earnings growth is sustained, its PEG ratio would theoretically fall below 4, suggesting it is undervalued relative to its growth. However, this calculation assumes consistent earnings, a challenge for a company with a history of volatility.

Conclusion: A High-Conviction Play in a High-Stakes Sector

AeroVironment's strategic alignment with the U.S. defense budget's focus on unmanned systems, AI, and attritable technologies positions it as a critical player in the modernization era. While its valuation metrics appear elevated, they are tempered by robust growth expectations and a contract pipeline that reflects the DoD's prioritization of innovation. For investors willing to tolerate short-term volatility, AVAV offers a compelling case: a company with a clear line of sight to long-term demand, a diversified portfolio of cutting-edge solutions, and a track record of securing high-value contracts.

The key to unlocking its potential lies in the execution of its R&D initiatives and the stability of defense spending. If the $1.5 trillion budget proposal materializes, AVAV could emerge as a defining success story in the defense sector's next phase of evolution.