AeroVironment's Earnings: Can AVAV Catch Up to Soaring Defense Stocks?

The aerospace and defense sector, as tracked by the SPDR S&P Aerospace & Defense ETF (XAR), is having a stellar 2026, outperforming the S&P 500 by a wide margin. XAR is up over 16% year-to-date and more than 22% over the last three months. In stark contrast, AeroVironment (AVAV) has been a notable laggard, down over 8% in the last three months despite being up about 5.5% for the year.

This underperformance sets the stage for the company's upcoming earnings report on March 3rd. Investors are keenly watching to see if AeroVironment can close the performance gap with its peers. The company operates in high-growth areas like unmanned aerial systems (drones), tactical missiles, and EV charging systems, which are central to proposed increases in U.S. defense spending.

The fundamental story is strong. Through the first half of its 2026 fiscal year, AeroVironment's revenue has surged 145% year-over-year. The company has guided for full-year revenue between $1.95 billion and $2 billion, which would more than double its first-half results. This growth was fueled by a record $3.5 billion in contract awards last quarter.

Adding a geopolitical dimension, the article notes the potential for U.S. military action in Iran, which would likely create immediate demand for AeroVironment's products and services. This external catalyst adds another layer of potential upside beyond the company's already impressive organic growth.

For investors, the central issue with AVAV stock is valuation. The company trades at a rich 15 times sales, a multiple that demands not just high revenue growth but eventually, strong profit growth. The current problem is that margins have collapsed, with adjusted gross margins falling to 27% from 41% a year ago.

This margin compression is attributed to three main factors: a disruptive transition to a new Oracle financial system, a revenue mix shift toward lower-margin services after an acquisition, and shipment delays caused by a U.S. government shutdown. These are significant headwinds that have rightly concerned the market.

Management's credibility is on the line. They are optimistic that margins will recover into the high 30% range by the fourth quarter as software issues are resolved and higher-margin product shipments resume. If they deliver on this forecast, it would support analyst expectations for 31% earnings growth, making the current sales multiple more palatable.