AeroVironment: Drones, Dollars, and the Delicate Dance of Defense Contracts

AeroVironment, Inc. has been a darling of the defense sector in 2025, riding high on the back of swelling global military budgets and a record $1 billion contract for its Switchblade loitering munitions. But the past five days have seen the stock lose altitude—dropping 7.4%, even as its six-month gains stand at a robust 42.9%. Why did Wall Street suddenly hit the eject button?

Contract Windfalls, Margin Whirlwinds

On the surface, AeroVironment’s numbers are a parade of superlatives. Fiscal 2025 revenue soared to $821 million, a 14% jump year-on-year. Its latest quarter saw revenue leap 140% to $454.7 million, on the back of blockbuster bookings and the integration of BlueHalo. Funded backlog stands at an eye-watering $1.07 billion. So why the gloom?

The devil, as always, is in the details. Gross profit margins have retreated—from 39.8% in 2024 to just 31.0% for the trailing 12 months in 2025. The latest quarter saw margins dip even further, down to 21%, as AeroVironment digested non-cash purchase accounting and amortization expenses from the BlueHalo acquisition. Operating margin? -4.7%, deep in the red, with net income margin at -4.1% and free cash flow running negative at -16.9% of sales. Investors—ever allergic to shrinking profitability—have taken notice.

Supply Chains and Sanctions: The Shadow Over Silicon

AeroVironment’s drones and munitions depend on rare earth metals and advanced electronics—many sourced from China. This supply chain, already strained, came under fresh pressure in 2025. In January, China slapped sanctions on AeroVironment in retaliation for U.S. military exports to Taiwan. By March, China placed AVAV on its export control list, adding another layer of uncertainty. These moves have forced the company to scramble for alternative suppliers and have sparked fears about future cost escalation and delivery delays.

The market, always forward-looking, is pricing in the risk that even fat contracts can be whittled down by bottlenecks and geopolitics. With 91% of revenue tied to fixed-price contracts, margin compression from cost inflation is a real threat.

BlueHalo: A Leap Into the Unknown

The $3.5 billion BlueHalo acquisition—completed in May—was billed as a masterstroke, expanding AeroVironment’s reach into cyber, space, and directed energy. But the integration has not been seamless. BlueHalo’s heavy amortization charges have weighed on results, while the company now faces the challenge of remediating internal control weaknesses inherited from its new subsidiary. Investors are wary: will the promised synergies materialize, or will management get bogged down in operational headaches?

Meanwhile, goodwill sits at $2.54 billion, with impairment charges a looming threat should forecasts slip. The recent $18.4 million goodwill write-down in unmanned ground vehicles (UGV) suggests the market is right to worry.

The Defense Sector: Rockets, Risks, and Repricing

The aerospace & defense industry isn’t immune to volatility. While the sector has rallied 31% over the past year, AeroVironment’s own one-year gain of 26.9% looks respectable—until this week’s stumble. With global defense spending up 8.1% to $2.3 trillion, competition is fierce. Israeli and Turkish drone makers, flush with export orders, are biting at AeroVironment’s heels. The company’s reliance on U.S. government contracts (91% of revenue) is both a blessing and a vulnerability: budget delays or policy pivots can send shockwaves through earnings.

Investor Euphoria: The Hangover

AeroVironment’s market cap ballooned on contract wins and acquisition buzz, but the valuation now sits at a nosebleed 88x earnings. With cash flow negative for three years running, the company is betting that 2025 will flip the script. But as the past week shows, sentiment can sour quickly when the promise of future growth collides with the reality of margin pain and integration risk.

The story of AeroVironment isn’t finished—far from it. But for now, the market is reminding investors that in the world of drones and defense, even record revenues can’t guarantee a smooth flight.