AeroVironment (Nasdaq: AVAV) is a defense contractor that sells small unmanned aircraft systems (“UAS”) –colloquially known as drones –to the US and allied governments (~90% of its business) and also operates an unrelated business tied to electric-vehicle charging (“EES” ~10% of business). Our fundamental and forensic research suggests looming disappointment and 30% -50% downside ($24 -$34 per share).
AVAV Nearly Identical To Our iRobot Short, Another Over-Hyped Play On A Laggard In Its Industry:Spruce Point conducted an extensive evaluation of AVAV, and find it to be a nearly identical stock promotion to iRobot. AVAV is being hyped as a play on drones, but its products are stagnant and being out-innovated by peers. Like iRobot, we find: 1) Foolish stock promoters, including a former one tied to a notorious Ponzi scheme, 2) Poor governance + unjust insider enrichment, 3) Continuous insider selling,4) Poor capital allocation, 4) Frequent accounting errors + warranty revisions, and 5) Nonsensical and distorted valuation
AVAV’s Drones Fail In Real-World Conditions; Its Technology And R&D Have Fallen Behind:While hope springs eternal that AVAV will one day broaden its horizons by selling its drones to businesses and not militaries, the market has overlooked the evidence that its drones work poorly even for military uses. An internal Department of Defense document released via FOIA request shows that one of AVAV’s key products “did not meet key performance parameters,” calling into question its usefulness in actual combat. Problems included poor landing accuracy (with a 44% failure rate), an inability to cope with high winds (a feature that was supposed to be designed into the product), and an unexpectedly heavy and fragile carrying case. Military test operators used words like “chintzy,” “cumbersome,” and “horrible” to describe AVAV’s drones.
Stock Promotion Runs Deep At AVAV, Valuation Can Correct 30%-50% As Disappointment Looms Large:Insiders have consistently sold shares (47% post IPO to 11% ownership currently), while a laundry list of rogue brokers have relentless pumped AVAV since its IPO (remember Stanford Financial or Jesup & Lamont?). Also don’t be Fooled when Mr. Motley says “buy” -recall they have also relentlessly promoted iRobot. True to form, AVAV has exhibited terrible FCF generationand margins, high management turnover, unwillingness to engage activist investors, and limited long-term share price upside until recent ETF buying. Even typically optimistic sell-side analysts don’t currently recommend AVAV, with zero buy ratings and an average price target of $40 (implying 17% downside). AVAV’s valuation current peak valuation of approximately 3x and 30x 2018E Sales and EBITDA will eventually normalize with defense industry peers and with its own historic valuation. As a result, we see 30%-50% downside in its share price, or $24 to $34 per share, representing a terrible risk/reward.