AeroVironment stock: why Cramer says 'be careful' despite strong Q4 earnings

Famed investor Jim Cramer is urging investors to “be careful” on AeroVironment AVAV shares even though the drone specialist posted a strong Q4 release late on Jun. 29.

The company reported an exciting $1.84 a share of earnings for its fourth quarter as revenue more than doubled year-over-year to a record $642 million – both ahead of Street estimates.

Investors are cheering AeroVironment stock also because the defense-tech contractor ended its Q4 with $1.2 billion funded backlog – up a whopping 65%.

That said, the firm’s share price remains down nearly 60% versus its year-to-date high.

Why Cramer recommends caution on AeroVironment stock

Jim Cramer recommends caution mostly because of the bearish narrative surrounding AVAV shares.

“The short sellers in this thing are so powerful,” he said on CNBC, adding they’re fully convinced that AeroVironment “paid too much” for BlueHalo.

According to him, AVAV is currently trading near a bottom, and a strong Q4 print could help keep it in the “green”, but warned the possibility of significant short-term volatility due to a coordinated assault by institutional bears remains on the table.

All in all, the former hedge fund manager favours being on guard because the “lies that have been told about this company and shading of the truth” are extraordinary.

Valuation and technicals warrant selling AVAV shares

Beyond the short-seller concern, there are “technical vulnerabilities” that warrant taking profit in AeroVironment shares at current levels.

For starters, the company is currently going for a forward price-to-earnings (P/E) multiple of about 37x, which makes it more expensive to own than the best-of-breed AI stocks, including Nvidia at about 22x only.

This premium valuation leaves almost zero margin for operational error, especially within a capital-intensive aerospace sector.

Moreover, despite the post-earnings rally, AVAV sits firmly below its key moving averages (MAs), reinforcing that the broader downtrend remains intact.

And it’s not like AeroVironment currently pays a dividend to incentivize ownership despite these technical sell signals.

Wall Street remains bullish on AeroVironment

The final factor complicating AeroVironment's operational runway is the rapidly shifting economic landscape of modern drone warfare.

The company has historically focused on engineering complex, premium-tier, super expensive unmanned aerial vehicles.

But recent data – including from the Ukraine war – proves modern combat favours cheap, disposable, mass-produced first-person view drones over “high-margin”, bespoke military hardware.

As Cramer succinctly summarized in his closing remarks, “if they had cheaper drones, it would help.”

Simply put, until management successfully expands its product line to include cost-effective, high-volume alternatives that can actively compete with cheap international models, AVAV stock risks losing structural market share.

That said, Wall Street continues to rate AeroVironment at “Strong Buy”, with the mean price target of about $295, signaling massive further upside in it over the next 12 months.