Sell AXON Stock And Buy AVAV Stock?

We believe that AeroVironment stock, (NASDAQ:AVAV), a drone and uncrewed vehicle maker, is a better pick than its industry peer, Axon Enterprise stock (NASDAQ: AXON), best known for its products for the law enforcement agencies, including taser and body cams. AXON stock trades at 27x trailing revenues, versus 7x for AVAV stock, thanks to Axon’s superior revenue growth and profitability. However, we think this gap in valuation will narrow in favor of AeroVironment in the coming years. There is more to the comparison, and in the sections below, we compare a slew of factors, such as historical revenue growth, returns, and valuation for these stocks.

AXON Stock Returns Have Been Far Better Than AVAV As Well As The Broader Markets

AXON stock has seen stellar gains of 435% from levels of $125 in early January 2021 to around $670 now, vs. an increase of 130% for AVAV stock. This compares with about 60% gains for the broader S&P 500 index over this roughly four-year period. Admirably, AXON stock has outperformed the broader market in each of the last three years. Returns for the stock were 28% in 2021, 6% in 2022, and 56% in 2023. This was not the case for AeroVironment, with its stock seeing returns of -29%, 38%, and 47% in the last three years, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that AVAV underperformed the S&P in 2021.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including MMM, UPS, and HON, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Axon’s Sales Growth Is Superior, Thanks To Taser And Body Cams

Axon has seen its revenue rise at an average annual rate of 32% from $681 million in 2020 to $1.9 billion now. On the other hand, AeroVironment’s average revenue growth rate of 22% from $395 million in fiscal 2021 (fiscal ends in April) to $754 million now, has been comparatively slower.

Axon’s revenue growth lately has been led by increased demand for taser and body cams. The company is benefiting from increased adoption for its products, amid continued innovation. For example, Axon’s Draft One uses generative AI to convert the audio from the body cam into a report narrative draft. Also, it can translate over 100 languages. Such offerings help improve the efficiency of the police force. Looking at the latest quarter, Axon’s sales were up a solid 32% y-o-y, driven by a 36% jump in its Cloud & Services business, while Sensors & Other revenue was up 18%.

AeroVironment’s revenue growth lately is being driven by its uncrewed systems and loitering munitions systems (kamikaze drones). The loitering munitions systems sales were up a whopping 60% y-o-y in fiscal 2024, while the uncrewed systems revenue were up 30%. Given the elevated geopolitical tensions in the Middle East and Europe, there is an increased demand for uncrewed systems, bolstering AeroVironment’s top-line growth. AeroVironment’s Switchblade are employed in Ukraine. Just a few months back, the U.S. army awarded a $1 billion contract to AeroVironment for its kamikaze drones.

Looking forward, we expect both companies to see strong revenue growth in the coming years. Still, we think Axon is likely to fare better, with its sales expected to nearly double from $1.6 billion in 2023 to around $3 billion in 2026. We think AeroVironment’s sales could rise by over 40% over this period.

Axon Is More Profitable Than AeroVironment And Offers Lower Financial Risk

Axon’s operating margin declined from 63% in 2020 to 51% in 2023, while AeroVironment’s operating margin contracted from 11% in fiscal 2021 to 10% in fiscal 2024. If we look at the last twelve-month period, Axon’s operating margin of 54% fares much better than 9% for AeroVironment.

Looking at financial risk, Axon has an edge over AeroVironment. Although its 1% debt as a percentage of equity is similar to AeroVironment, its 33% cash as a percentage of assets is much higher than 8% for the latter. This implies that both companies have a good debt position, but Axon has more cash cushion.

AXON Wins Hands Down, But Then Why Do We Say AVAV Is A Better Pick?

While Axon has a better revenue growth, is more profitable, and offers lower financial risk, its stock has run up quite a bit. It’s up a stellar 160% this year, of which, over a 55% move came in a month. We think AXON is now slightly overpriced. At its current levels of $670, AXON trades at 27x trailing revenues, which is much higher than the stock’s average P/S ratio of 12x over the last three years. Now, some rise in valuation multiple seems warranted, given the strong sales and earnings growth. An increased adoption of its products bodes well for the stock in the long run, given that the company earns recurring revenues from sales of cartridges and services for its products.

Furthermore, with Trump in the White House, law enforcement agencies are expected to be well funded under the new administration. There is a possibility of increased spending on technologies and products to improve security. Now, this factor bodes well for both Axon and AeroVironment.

In comparison, AVAV stock, at levels of $193, trades at 7x trailing revenues, slightly higher than the stock’s average P/S ratio of 6x over the last three years. With increasing geopolitical uncertainty, the demand for drones may remain high. This implies more sales of drones. Ukraine is employing AeroVironment’s drones, Israel also received hundreds of kamikaze drones. The latest $1 billion contract from the U.S. army also reflects the increasing demand for drones. We think AVAV stock deserves an upward revision in valuation multiple. Notably, the $228 average of analysts’ price estimate reflects nearly a 20% upside from the current levels and factors an 8x P/S ratio.

While AVAV looks a better pick over AXON, it is helpful to see other valuable comparisons for companies across industries at Peer Comparisons. Separately, look at Why Is Salesforce Stock Up 12%?

[1] Returns as of 12/4/2024
[2] Cumulative total returns since the end of 2016

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