AeroVironment's Margin Erosion Exacerbates Cash Flow and Valuation Concerns

What happened

AeroVironment reported robust 151% revenue growth, driven by record contract awards and global defense tensions, but its adjusted gross margin fell sharply to 27%, highlighting profitability pressures. Management raised revenue guidance to $1.95–2.0 billion but lowered non-GAAP EPS estimates, indicating that top-line expansion is not translating to bottom-line strength. Execution risk is elevated, with 70% of EBITDA expected in the fourth quarter, underscoring operational volatility and potential for quarterly misses. This margin compression aligns with the DeepValue report's warnings about negative free cash flow, which was -$168.8 million in the first half of FY26, and heavy goodwill from the BlueHalo acquisition. Despite a 56% stock price surge, the valuation remains stretched with a negative P/E and high EV/EBITDA, casting doubt on the sustainability of growth amid cash flow challenges.

Implication

The sharp margin drop signals underlying cost inefficiencies or pricing pressures in AeroVironment's operations, potentially eroding long-term profitability. Lowered EPS guidance contradicts revenue optimism, suggesting management may be overpromising on earnings despite top-line growth. High Q4 EBITDA concentration increases the risk of operational missteps and stock volatility, making the investment case more speculative. Negative free cash flow and a goodwill-heavy balance sheet from the BlueHalo deal heighten financial risks, including potential impairments and liquidity strains. Given the rich valuation after a significant price run, investors are better off avoiding new positions or trimming existing ones until cash generation improves and integration proves successful.

Thesis delta

The new article reinforces the DeepValue report's 'POTENTIAL SELL' thesis by confirming execution and profitability risks. Margin compression despite strong revenue growth validates concerns about weak cash flow conversion and integration challenges from the BlueHalo acquisition. This strengthens the sell bias, as the company's elevated valuation appears increasingly disconnected from deteriorating fundamental metrics.