AeroVironment raising fresh capital is your cue to sell AVAV shares: here's why

AeroVironment Inc (NASDAQ: AVAV) opened more than 7.0% down this morning after revealing plans to raise about $1.35 billion in fresh capital.

The defense contractor will raise $750 million through a common stock offering with the balance coming from convertible senior notes expiring in 2030, according to its press release on Tuesday.

Despite today’s price action, AeroVironment stock is up some 135% versus its year-to-date low.

Why is AeroVironment stock slipping on Tuesday?

AeroVironment plans on using this capital raise primarily to repay debt with the leftover earmarked for improving manufacturing capacity.

Still, AVAV shares are slipping mostly on dilution concerns.

Historically, equity offerings tend to reduce the ownership of existing shareholders and result in a meaningful decline in a company’s earnings per share.

Plus, the convertible senior notes, while not immediately dilutive, do introduce future risk if converted into equity.

Moreover, the timing also raises eyebrows: issuing common stock after a meteoric run in recent months suggests management believes the stock is fully valued, if not overextended, which may be contributing to further dampening the bullish sentiment.

Note that AeroVironment is not a dividend stock either.

Why have AVAV shares soared in recent months?

AVAV stock has been in a sharp uptrend for three big reasons.

Most recently, the company based out of Arlington, Virginia reported a strong Q4 that made famed investor Jim Cramer call it the “next Palantir of hardware.”

Investors have been cheering AeroVironment also because it spent $4.1 billion in early May to buy Blue Halo, which strengthened its position as a multi-domain defense leader, expanding into high-growth areas like space, cyber, and directed energy.

Finally, President Trump signed an executive order last month to boost US drone production and crack down on unauthorised uses as well which many believe will remain a tailwind for AVAV shares moving forward. 

Is it worth investing in AeroVironment today?

However, investors should note that AeroVironment stock is not cheap at its current valuation.

It’s going for a forward price-to-earnings multiple of more than 94 at writing – significantly higher than a number of AI stocks, even including Nvidia, that’s trading at about 39 only on Tuesday.

Wall Street’s current estimates for AVAV shares also substantiate the aforementioned concerns of overvaluation.

While the consensus rating on the drone maker remains a “buy”, according to the WSJ – the mean target of about $256 indicates a potential “downside” of 4.0% from here. 

In short, AeroVironment may be a compelling long-term play on defense innovation and US drone proliferation, short-term risks tied to dilution, valuation, and timing of equity raise could pressure the stock.

Investors may, therefore, want to tread carefully as the market digests this strategic shift amid an already aggressive rally in AVAV stock.