AeroVironment (AVAV) Stock Looks Cheap On Cash Flow But Expensive On Sales
AeroVironment stock is caught between two valuation messages right now, with a Discounted Cash Flow (DCF) intrinsic value estimate pointing to meaningful upside, while market based multiples paint a more expensive picture. This comes after a share price that is still well below its recent highs despite a 61.3% gain over the past three years.
- Over the last three years AeroVironment has returned 61.3%, which keeps long term holders ahead even though the stock is currently trading near its recent lows.
- Fresh contract wins in Germany and under the U.S. Domestic Shield program can support expectations for future cash flows, but a recent share price slide and sector wide pullback highlight how quickly sentiment can turn if those expectations are questioned.
- With AeroVironment scoring 4 out of 6 on the valuation checks, the overall picture is mixed rather than a clear bargain or clear overvaluation.
The issue now is whether AeroVironment's current price around US$149 fairly reflects that intrinsic value estimate pointing to a 27.6% discount, or whether the richer market multiples are signaling that most of the good news is already in the stock.
Find out why AeroVironment's -46.4% return over the last year is lagging behind its peers.
Does AeroVironment Look Undervalued on Cash Flow?
The Discounted Cash Flow (DCF) model estimates what AeroVironment is worth based on projected future cash the business can generate for shareholders. For AeroVironment, the latest twelve month free cash flow is a loss of $153.5 million, so the model assumes cash flows recover and grow from this starting point rather than stay at current levels.
Based on those projections, the DCF points to an intrinsic value around $206 per share, compared with a current price near $149. This implies the stock screens about 27.6% undervalued on this basis. The recent $500 million Domestic Shield counter UAS contract helps explain why the cash flow outlook feeding into this model is supportive even though the share price has slid.
On the DCF numbers alone, AeroVironment stock appears undervalued relative to what its projected cash flows suggest it could be worth.
Our Discounted Cash Flow (DCF) analysis suggests AeroVironment is undervalued by 27.6%. Track this in your watchlist or portfolio, or discover 49 more high quality undervalued stocks.
Has AeroVironment Run Too Far on Sales?
P/S is a useful cross check for AeroVironment because revenue is the clearest, least adjusted indicator investors have for this kind of defense technology company.
Right now AeroVironment trades on a P/S of about 3.8x, compared with an Aerospace & Defense industry average around 5.1x and a peer group closer to 5.3x. On the surface that makes the stock look cheaper than many rivals on sales. However, a more tailored fair P/S ratio for AeroVironment, which factors in its size, margins, risk profile and sector characteristics, is lower at roughly 3.1x.
Compared with that fair ratio, AeroVironment’s current 3.8x P/S indicates that investors are paying a premium relative to the level suggested by this model, even if the stock appears below the raw industry and peer averages.
On the preferred P/S multiple, AeroVironment screens as overvalued relative to the fair sales-based level implied by its own fundamentals.
See what the numbers say about this price — find out in our valuation breakdown.
The AeroVironment Narrative: What Would Justify Today's Price?
Simply Wall St Narratives pick up where AeroVironment's valuation puzzle leaves off by spelling out which assumptions about AeroVironment's future growth, margins and earnings would need to hold for the stock to be worth materially more or less than today's price, and they sit on the company’s Community page. Instead of stopping at a single output from a ratio or model, they unpack the future that figure depends on so you can watch how those conditions play out over time.
One of the top community narratives on AeroVironment: 47% undervalued
"With the recent integration of BlueHalo, the company has transformed into a comprehensive "all-domain" provider, adding space, cyber, and directed energy (lasers) to its portfolio…"
Read one of the top narratives on AeroVironment
Do you think there's more to the story for AeroVironment? Head over to our Community to see what others are saying!
The Bottom Line
For AeroVironment, the Discounted Cash Flow (DCF) intrinsic value estimate points to meaningful upside, while the sales based multiple suggests the stock is overvalued relative to its tailored fair P/S. That split mainly comes down to how much weight you put on long term cash flow potential versus what peers currently trade on and how much growth is already priced in. With the broader valuation checks landing in a mixed zone, the key question from here is whether AeroVironment can deliver the cash flow and profitability profile implied in the DCF, or whether the current P/S better reflects what the business can sustain.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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