I’ve been following military drone manufacturer AeroVironment (AVAV -2.32%) for a very long time — ever since it was just a newborn babe of a defense stock after its 2007 initial public offering (IPO), in fact. And I have to tell you that, over all this time, I’ve never seen AeroVironment win a defense contract as big as the one that it won last Tuesday: $1 billion.

Well, $990 million to be exact.

The Aug. 27 edition of the Pentagon’s daily contracts update put AeroVironment front and center and at the very top of the announcement, naming it the recipient of a $990 million U.S. Army contract “to provide an organic, stand-off capability to dismounted infantry formations capable of destroying tanks, light armored vehicles, hardened targets, defilade and personnel targets.”

How AeroVironment won the contract

The contest wasn’t even close. Turns out, this was a sole-source contract in which AeroVironment was the only bidder. And the reason? While the language of the contract announcement is a bit vague, it appears to refer to only one item in the Pentagon’s arsenal — a weapon that only AeroVironment produces: The Switchblade 600 loitering munition system.

The Switchblade 600 launches from a tube, mortar-style, before extending its wings. It can fly at speeds of up to 125 mph, and strike targets as far away as 25 miles. The weapon weighs 65 pounds — of which half is warhead. AeroVironment describes the Switchblade 600 as possessing “high-precision optics, over 40 minutes of loitering endurance, and an anti-armor warhead for engaging larger, hardened targets at greater distances.”

So while Switchblade isn’t specifically named in the $1 billion contract, it seems pretty clear that Switchblade is exactly what the Army is buying.

What it means for AeroVironment

The end result is a big win for AeroVironment: A single contract worth more money than the company brought in in revenue for 2022 and 2023 combined, according to data from S&P Global Market Intelligence, and 38% bigger than fiscal 2024 revenue.

Granted, the new $990 million Army contract will be fulfilled over five years. (Its completion date is Aug. 26, 2029.) But even divvied up over half a decade, this contract works out to an extra $198 million per year in revenue, and should therefore add 28% revenue growth in just its first year of operation — nearly twice the 16% revenue growth that Wall Street was expecting.

At AeroVironment’s current 8% net profit margin, that should work out to about $0.59 more profit per diluted share, per year, as well — and potentially more than $1 a share if scaled production allows AV to operate more efficiently, and profit margins return to 2019 levels. For a defense stock that earned just $2.18 per share last year, that’s a significant sum.

Is AeroVironment stock a buy?

But is it enough of a difference to make AeroVironment stock a buy? That’s where I’m a little less sure, and feel a little hesitant to recommend the stock.

Consider: At $2.18 per share and a $192-ish share price, AeroVironment currently costs a whopping 88 times trailing earnings. Add $0.59 to that per-share profit, and the stock would still cost more than 69 times earnings. Add a full dollar, and the stock still costs 60 times trailing earnings. Even at a 28% earnings growth rate, those valuations aren’t cheap.

On top of that, AeroVironment’s “earnings” may not be all they’re cracked up to be. Free cash flow (FCF) at the company, for example — cash profit — has been running negative for the last three straight years. Granted, analysts are forecasting AeroVironment will turn FCF-positive in 2025, and last week’s contract win makes that outcome a little more likely. But if the analysts are right, it won’t be until 2026 that the company approaches $100 million in real free cash flow. And with the company’s market capitalization standing well over $5 billion currently, it’s hard to argue that the stock’s valuation would be cheap even then.

Long story short, this contract is great news for AeroVironment, the company. But it needs to win even more contracts, and grow its profits (and free cash flow) even faster, before AeroVironment stock will become an attractive buy.