AeroVironment’s (NASDAQ:AVAV) December price contraction is a buying opportunity because of its position as a next-gen defense contractor, solid results, growth, guidance, analyst trends, and the institutions buying this stock like mad. The institutional activity is noteworthy because the group owns more than 85% of the stock, has been buying on balance quarterly in 2024, and the balance of activity is ramping higher. The balance of activity in the first two months of calendar Q4 is at a multi-year high with another month left to go, providing a powerful tailwind for the market. It is unlikely that these trends will end and more likely that this stock will quickly regain lift, resume the uptrend, and move to new highs. 

What does AeroVironment do? It makes drones but, more importantly, AI-enhanced Loitering Munitions Systems that give Western powers an aerial advantage. LMS uses high-output electric systems to remain on station for hours, flying over targets using computer vision and other AI enhancements to observe and seek targets of opportunity. The drones either deliver a payload or are the payload. Among the drivers for AeroVironment's business today is increasing demand for next-gen systems, including AVAV’s AI retrofit kit for older models and global remilitarization. Military spending hit a fresh high in 2024 and is expected to grow in calendar 2025. 

AeroVironment had a solid quarter for FQ2 2025/CQ3 2024, with revenue rising 4.2% to a quarterly record. The top line is nearly 400 basis points ahead of MarketBeat’s reported consensus on strength in LMS systems and MacCready Works. LMS sales grew by 157%, while MacCready Works, where the most advanced unmanned systems are made, grew by 42,% offset by a 35% decline in legacy unmanned systems. 

The margin news is among the factors that weighed the market down following the release. The company reported a narrower gross margin compounded by increased SG&A expenses. The caveat is that the gross margin contraction is related to a product mix shift into LMS from legacy, and SG&A is up on R&D and acquisition costs. Increased SG&A is a concern, but R&D will lead to technological advancement and future sales, and acquisition costs will evaporate in time while leading to future sales. 

The sell-side trends, including analyst sentiment and institutional ownership, are bullish in 2024. The analyst trends include increasing coverage, sentiment improving to Buy from Moderate Buy, and a rising consensus price target. The first revisions tracked following the FQ2 2025 release reaffirm the trend and suggest a possible move into the analysts’ high-end target range. The consensus implies a nearly 25% upside from the critical support target, while the high-end range adds another 20%. 

The technical action is sketchy, with the market down more than 10% and extending a sell-off that began in November. However, this market is volatile and ratcheting higher within a rising channel and is likely to continue doing so this year because of the sell-side support. The critical support target is near the $170 level and may be tested more than once. A fall below that level will break the trend and lead to a trading range if not a larger decline. Confirmation of support will lead to a year-end rally and a move to the high end of the channel in early 2025.