Why AeroVironment Stock Plunged Today

AeroVironment (open -9.52%) Stock, the maker of drones for the U.S. military, delivered an impressive “beat and raise” quarter last night, reporting better-than-expected earnings and promising more profits.

Looking ahead to AV’s second quarter of fiscal 2024, analysts forecast the company would earn just $0.62 per share on revenue of $171 million. Instead, AV earned $0.97 per share on revenue of $181 million.

And the stock plunged 10.8% (as of 11:30 a.m. ET).

wait. what?

Yes, you read that right. The small defense company AeroVironment also raised its earnings guidance for the end of the year after beating Wall Street’s profit forecasts with a stick. (that much low AV’s new guidance range of $2.46 to $2.70 per share is actually higher than the midpoint of Wall Street forecasts of $2.45 per share. But investors are selling stocks anyway.

The question is why?

Second quarter sales soared 62% compared to the same period last year. profits have increased 366% compared to previous year. And CEO Wahid Nawabi said AV is seeing “growing demand” for its products and is pushing guidance for $685 million to $705 million in revenue this year (a 29% jump), with positive earnings per share compared to last year’s. It said it was a significant improvement over its net profit of more than $7. Loss.

Maybe I’m just being blind, but I don’t see much bad news in any of it.

Except one thing

It seems that only after reading AeroVironment’s full press release can investors finally find answers to the following questions: Maybe these numbers aren’t as good as they seem?

After digging through all the prose and deep dives into the company’s cash flow statement at the bottom of the press release, we learned that AV’s incredible sales growth and impressive “profit” return ultimately generated $35.7 million. negative The company’s free cash flow through the end of the first half of fiscal 2023 is actually worse than the $24.1 million in free cash flow it generated through the first half of fiscal 2023.

And what this means is that despite sales growth and reported profits, AeroVironment stock is now on track to report negative free cash flow for the third year in a row. And a company that doesn’t generate enough cash internally to fund its operations is probably a company that doesn’t deserve a market capitalization of $3.5 billion, and its stock isn’t worth selling for more than $3.5 billion. $127 per share.

Simply put, despite “beating earnings,” “raising guidance,” and generally doing all the right things investors want to see a stock do on earnings day, AV stock is still more expensive than expected. And investors selling AV stocks today are making the right decision.