Is AeroVironment (AVAV) Still a Buy Despite a 111% Surge and Mixed Valuation Signals?

AeroVironment (NASDAQ: AVAV) has surged 111% in 2025, driven by a $3.5 billion contract backlog and a dominant position in U.S. military drone and counter-drone systems. Yet, the stock's recent 6.1% post-earnings decline and conflicting valuation signals have sparked debate: Is AVAV still a buy for contrarian investors seeking long-term growth in defense technology?

Revenue Growth vs. Margin Pressures

AeroVironment's Q3 2025 results underscored its dual-edged momentum. Revenue hit $472.5 million, a 151% year-over-year jump, driven by record contract awards in autonomous systems and loitering munitions. However, non-GAAP adjusted EPS of $0.44 fell 44.2% below estimates, while adjusted EBITDA of $44.96 million missed forecasts by 35%. The operating margin turned negative (-6.4%), a stark contrast to 3.7% in the prior-year period.

Management attributed these challenges to operational headwinds, including ERP system transitions and delayed government funding. Yet, the company remains optimistic about margin recovery in 2026 as product revenue outpaces services and manufacturing scales with a new Salt Lake City facility. Analysts, meanwhile, highlighted the SCAR program's shift to fixed-price contracts as a critical inflection point for profitability.

Valuation Divergence: Overvalued or Undervalued?

The stock's valuation appears polarized. A DCF analysis suggests AVAV is overvalued by 12.7%, with an intrinsic value of $204.69 per share. Its P/S ratio of 8.37x also far exceeds the aerospace and defense industry average of 3.01x. These metrics imply the market is paying a steep premium for AVAV's growth narrative.

Conversely, bullish investors argue the company's $887 million U.S. Army contract awards-extending through 2031-justify a higher multiple. A prominent investor narrative projects a fair value of $404 per share, betting on AVAV's ability to scale margins and capitalize on its role in counter-UAS platforms and international markets. This divergence reflects divergent assumptions about AVAV's execution risks and long-term margin expansion.

Contrarian Case for AVAV: Defense Tech's "Unloved" Growth Story

For contrarian investors, AVAV's challenges may represent an opportunity. The company's 151% revenue growth in Q3 demonstrates its ability to secure high-margin, long-duration contracts in a sector with structural tailwinds. The U.S. military's pivot toward autonomous systems and counter-drone capabilities-markets AVAV dominates-offers a durable growth foundation.

Moreover, AVAV's valuation appears less stretched when viewed through a multi-year lens. While its P/S ratio is elevated, the company's funded backlog and contract visibility provide a degree of certainty rare in high-growth tech stocks. Analysts from BTIG and Goldman Sachs have reiterated "buy" ratings, citing AVAV's technological moats and $333–$430 price targets.

Risks and Realities

AVAV's path to sustained growth is not without risks. Operational inefficiencies, such as ERP implementation delays, could prolong margin pressures. Additionally, the company's reliance on government contracts exposes it to funding shifts and geopolitical volatility. Investors must also weigh whether the market will sustain its premium valuation if margins fail to recover as expected.

Conclusion: A High-Conviction Bet

AeroVironment's 111% surge has priced in much of its near-term optimism, yet its long-term potential remains underappreciated. For investors with a multi-year horizon, AVAV's dominant position in defense tech, expanding contract backlog, and management's confidence in margin recovery could justify the current valuation. However, the stock's volatility and operational risks demand a high degree of conviction. In a sector where "overvalued" often masks structural growth, AVAV may yet prove its skeptics wrong.