Why We're Not Concerned About AeroVironment, Inc.'s (NASDAQ:AVAV) Share Price

Simply Wall St ·  Dec 26, 2023 06:15

When close to half the companies in the Aerospace & Defense industry in the United States have price-to-sales ratios (or "P/S") below 2x, you may consider AeroVironment, Inc. (NASDAQ:AVAV) as a stock to avoid entirely with its 5.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for AeroVironment

NasdaqGS:AVAV Price to Sales Ratio vs Industry December 26th 2023

What Does AeroVironment's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, AeroVironment has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on AeroVironment will help you uncover what's on the horizon.

How Is AeroVironment's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as AeroVironment's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 48% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 73% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 11% per year during the coming three years according to the five analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 8.4% per annum, which is noticeably less attractive.

With this in mind, it's not hard to understand why AeroVironment's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that AeroVironment maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Aerospace & Defense industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for AeroVironment that we have uncovered.

If these risks are making you reconsider your opinion on AeroVironment, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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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