Why AeroVironment Stock Dropped 11% This Morning

What happened

Shares of drone maker AeroVironment (NASDAQ: AVAV) tumbled more than 11% in morning trading Wednesday, after Barron's published a piece questioning whether the stock's strong price performance -- it has more than doubled in the past 12 months -- is justified. Despite the tenuous justification for the morning's decline, it largely appears to be sticking. AeroVironment stock remained down 9.4% as of 11:24 AM EST.

So what

Barron's pointed out  that AeroVironment's "sales have been in a stall for years" and that its "free cash flow has recently been scarce" -- both are arguments that are hard to deny. The $265 million in revenue that AeroVironment collected last year was only $800,000 more than it collected in 2015, and amounted to a mere 5% increase over the past three years. Moreover, AeroVironment generated no free cash flow whatsoever in 2015 or 2016, and its trailing 12 month results show total cash profit of only $1.8 million -- just 9% of AeroVironment's $19.7 million reported GAAP profit for the period.

Now what

Attempting to make sense of why a company with so little cash profit or revenue growth has risen so much in price, Barron's speculated that the stock may be benefiting from automated buying by "trendy ETFs like Robo Global Robotics & Automation (ROBO), a popular fund that has made AeroVironment a top holding."

Unless it can show some improvement in its revenue growth, or translate more of the revenues it has into real cash profits, Barron's worries that "AeroVironment is headed for a hard landing."

That being said, it did show revenue growth of 21% in its fiscal first quarter 2018 earnings report in August, alongside significantly narrowed losses. If the company can maintain this kind of momentum the quarters to come, it may yet lay Barron's fears to rest.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends AeroVironment. The Motley Fool has a disclosure policy.