Why AVAV Stock Is At A Critical Crossroads And What Investors Should Watch

• AeroVironment (AVAV) faces immediate financial and operational headwinds from declining gross margins and risks tied to its largest contract with the U.S. Space Force according to financial analysis.
• A $186 million order from the U.S. Army for upgraded Switchblade munitions has provided near-term revenue visibility but does not address the company's broader margin challenges as reported.
• Raymond James downgraded AVAV to Underperform, citing risks in the SCAR program and concerns about the company's ability to maintain a strong backlog and stable revenue streams according to analyst reports.
• Operating metrics have deteriorated significantly over the past five years, with free cash flow turning negative and EPS declining despite revenue growth according to financial data.
• AVAV is scheduled to report Q3 FY 2026 results on March 10, 2026, with investors eager for management to address these financial and operational risks as announced.

AeroVironment is at a critical juncture. The company recently landed a $186 million order from the U.S. Army for its upgraded Switchblade 600 and 300 systems, providing some near-term revenue visibility according to market reports. At the same time, however, it faces growing concerns from analysts and investors about profitability and contract execution. Raymond James downgraded the stock to Underperform from Strong Buy, citing issues with the company's largest program of record, the Space Force's SCAR contract as stated in the downgrade.

The downgrade has triggered a sharp drop in AVAV shares, with the stock falling below $221.26—61% off its 52-week high according to trading data. This sharp correction highlights the growing unease among investors about whether AeroVironment can convert its robust backlog into sustainable, profitable revenue.

What Is Driving The Downgrade Of AVAV Stock?

Raymond James' downgrade stems from several concerns. First, the SCAR program—valued as the company's largest program of record—is now at risk. The U.S. Space Force has lost exclusivity on the $1.4 billion contract, raising questions about its long-term viability according to financial reports. This shift has caused analysts to reconsider AVAV's future revenue trajectory and its ability to secure similar large contracts.

Second, there are broader financial concerns. Over the past five years, AeroVironment's operating margin has dropped by 8.4 percentage points, and its operating margin for the trailing 12 months was a negative 6.5% as detailed in analysis. Meanwhile, free cash flow is at a negative 17.6%—a sign that the company is burning cash and becoming increasingly capital-intensive. These trends raise red flags about the company's ability to sustain growth without significant cost or structural adjustments.

Why Is AVAV Stock A Risk For Long-Term Investors?

For long-term investors, AVAV's current trajectory is a cause for caution. Despite the recent Army contract, the company is still grappling with profitability issues. Earnings per share (EPS) have declined by 9.9% annually over the past two years, even as revenue increased by 44.8% according to earnings data. That means the company is growing in size but not in per-share profitability—a red flag in a sector where margins often dictate stock performance.

Moreover, the company's cash flow has deteriorated significantly, making it harder to fund future growth without additional financing or cost-cutting. Management will need to show a path to improving margins and generating positive cash flow if AVAV is to remain a compelling long-term investment as indicated by analysts.

What To Watch From AVAV In The Coming Weeks

The key event on the horizon is AeroVironment's Q3 FY 2026 earnings report, scheduled for March 10, 2026 as scheduled. Investors will be listening closely to management's comments on the SCAR program, backlog conversion, and overall revenue outlook. The earnings call will feature CFO Kevin P. McDonnell and CEO Wahid Nawabi, both of whom will have to address the key concerns highlighted by analysts and investors as reported.

The report will also give insight into whether the recent Army order is helping to stabilize AVAV's financials or if the company is still struggling to turn backlog into sustainable revenue. With shares down sharply in recent trading sessions, a strong earnings report could provide a short-term boost—but the longer-term outlook will depend on how the company executes against its larger contracts and manages its operating costs.

At the end of the day, AVAV is in a tricky spot. It has solid near-term visibility thanks to the Army contract, but its long-term success depends on its ability to improve margins and execute large programs like the SCAR contract. For now, investors are watching closely—and waiting for clarity.