Why AeroVironment Stock Fell 14.1% in March

What happened

Shares of drone and tactical missile system manufacturer AeroVironment (NASDAQ: AVAV) declined 14.4% in March, according to data from S&P Global Market Intelligence. The decline marked another volatile month for the stock, but this is par for the course with a high-growth stock trading at a forward P/E ratio of around 40.

Simply put, such stocks tend to have a trading dynamic of their own. Indeed, the company gave its third-quarter 2019 results in early March, but by and large, the earnings were positive.

For example, full-year fiscal 2019 revenue from continuing operations is now expected to be $300 million to $310 million, compared with a previous range of $290 million to $310 million, meaning that the low end of the guidance range was raised. Similarly, diluted EPS from continuing operations is now expected to be $1.60-$1.80, compared with previous guidance of $1.30-$1.50.

If there was a negative in the results, it came from the fact that backlog was only $132.5 million and the end of January, compared with $163.9 million at the end of October. Given management's revenue guidance and the fact that year-to-date revenue stands at $226 million, it's clear that AeroVironment has enough in its backlog to easily meet its revenue guidance.

However, investors will be hoping for a backlog increase in the coming quarters if the company is going to meet analyst expectations for $362 million in revenue in fiscal 2020.

That said, the earnings were pretty good, and the post-earnings sell-off is probably down to the fact that stocks on high valuations often have high expectations built in and even a guidance increase might not be enough to satisfy many investors.

So what

In the long term, AeroVironment's prospects depend on U.S. defense spending and market-expanding possibilities such as potential State Department approval for AeroVironment's Switchblade to be sold overseas. Switchblade is a tactical missile system, which can be carried in a backpack, giving a soldier the capability to make a beyond-line-of-sight surveillance or precision strike.

Regarding the approval process, AeroVironment CEO Wahid Nawabi said during the last earnings call: "We still feel very strongly that it's a matter of when versus if, and we continue to work with that. The process is pretty long."

Now what

If you believe in the long-term growth story of AeroVironment drones and tactical missiles as being part and parcel of 21st-century warfare, and in the potential for international sales expansion, then you'll feel comfortable that AeroVironment can grow earnings enough to justify its heady valuation.

However, this is the sort of stock that will always be subject to speculation regarding defense budgeting and possible State Department approvals for Switchblade. In this context, don't be surprised if the volatility continues.

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