AeroVironment: Well-Positioned In Evolving Industry
Summary
- AeroVironment's Group 1 UAS products will become increasingly applicable in the changing landscape.
- AeroVironment is making solid gains in the highly promising HAPS space.
- Despite AeroVironment's dominance in small UAS, the company is starting to face more competition.
AeroVironment (NASDAQ:AVAV) continues to be a dominant presence in the small UAS (unmanned aircraft systems) industry. While AeroVironment's long-term path remains bright, the company is experiencing some headwinds. Most notably, the US military is potentially looking for Switchblade alternatives to the detriment of AeroVironment. The company also recently reported disappointing Q3 results, missing on both revenue and EPS.
AeroVironment's Q3 revenue of $61.89 million and EPS of -$0.04 missed expectations by $6.94 million and $0.19 respectively. Unsurprisingly, the company's stock price plunged following the release of quarterly results. Despite the recent bad news, AeroVironment is still very well-positioned in high potential industry.
Dominance in Small UAS
Small UAS is an increasingly important market. The growth of robotics and artificial intelligence is rapidly expanding the usefulness of smaller-sized drones and other unmanned aerial vehicles. With traditional warfare on the decline and asymmetric warfare on the rise, the stealth and agility offered by small UAS will grow in importance. Small UAS will almost certainly be far more cost-effective than large UAS in the new landscape.
Small UAS like AeroVironment's Raven will likely have a growing impact on the battlefield.
Source: Intelligent Aerospace
AeroVironment continues to maintain a strong foothold in the small UAS industry. The company continues to be a preferred partner of many governmental organizations, including the US military. In fact, AeroVironment dominates the fixed-wing Group 1(0-20 lbs.) UAS industry and is a preferred supplier of the US government and countless allied governments.
AeroVironment's Group 1 UAS products like the Raven and WASP are some of the most advanced in the industry. Given that small UAS accounts for 70% of AeroVironment's overall revenue at $162.9 million (first three quarters), the company will continue to innovate heavily in the space. Demand for small UAS will likely continue to grow at a fast pace moving forward, putting AeroVironment in a great position.
Promising HAPS Business
While small UAS remains the focal point of AeroVironment, HAPS (high-altitude pseudo-satellites) will likely become an increasingly important market for the company. AeroVironment's HAPS business already accounts for ~16% of the company's revenue and could have even more growth potential than small UAS. HAPS could allow AeroVironment to cement a strong foothold in the global connectivity industry.
The stratosphere is becoming an increasingly important domain for a growing number of businesses. New aerospace technologies are now allowing for easier access to the stratosphere, opening up a large number of new market opportunities. SpaceX, for instance, recently launched 60 Starlink satellites into the stratosphere in a continued effort to revolutionize the Internet. The stratosphere is a great environment to operate in given its his relative lack of weather impediments.
AeroVironment created a joint venture with SoftBank (OTCPK:OTCPK:SFTBY) called HAPSMobile, which aims at developing next generation telecom systems in the stratosphere. HAPSMobile currently develops the solar powered Hawk30, which is an unmanned aircraft that provides stratospheric telecommunications. The current value of contracts with HAPSMobile currently stands at $148.6 million and will likely grow substantially moving forward. AeroVironment should benefit tremendously as a first mover in this growing industry.
The stratosphere opens up many promising new markets for AeroVironment.
Source:HAPSMobile
Threats for Market Dominance
AeroVironment recently plunged after analysts at investment bank William Blair warned that the Pentagon requested $5.447 million in order to qualify an additional LMAMS (lethal miniature aerial missile system). Given that AeroVironment's Switchblade currently dominates this space, this news can only be bad for the company. Additional LMAMS suppliers will almost certainly mean that the Switchblade will lose market share.
The Switchblade could face for more competition if the Pentagon qualifies more LMAMS.
Source: Business Wire
AeroVironment's Raven also appears to be under threat as competition ramps up in the small UAS space. Given that the Raven accounts for a sizable portion of AeroVironment's revenue, market share loss would definitely negatively impact the company. As demand for small UAS grows, competition will undoubtedly flood the market.
Moreover, AeroVironment is still a relatively small company compared to other major defense contractors like Lockheed Martin (LMT) or Northrop Grumman (NOC). If these large defense contractors decided to heavily invest in the small UAS market, AeroVironment could easily be outcompeted. However, AeroVironment would more likely be a target of acquisition in such a scenario.
Conclusion
AeroVironment is well-positioned in several high-growth industries. The company still has more room to grow at its current market capitalization of $1.4 billion and forward P/E ratio 33. As asymmetric warfare becomes the norm in modern times, traditional large aerial vehicles will likely become less relevant moving forward.
The stealth and agility offered by small UAS should become far more appealing both militarily and commercially in the coming years. Moreover, exponential growth in robotics and AI will only further expand the addressable market of AeroVironment. While AeroVironment reported somewhat lackluster Q3 results, the company still has a strong growth path ahead.
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