Description

AVAV Long Thesis:

Will aim to keep this simple/brief, and happy to dig in further in comments for Q&A.

I view AVAV as an attractive long at current trading levels and as somewhat of a relative value play vs. where other high growth defense companies are trading in the private markets.

Aerovironment produces several defense products which are purchased mainly by the U.S. government but also by American allies (either directly or indirectly). Its principal products help with reconnaissance/surveillance on the battlefield.

Anduril has become somewhat of a golden child of the VC world in recent years. Anduril recently raised capital at a $14bn valuation, representing an estimated 25x revenue run rate.

While there are differences in the two businesses, AVAV is also fast growing and has ~50% more revenues but yet trades at ~40% of the valuation in the public markets.

Good overview on the company’s history here:

https://archive.ph/qi9tC

Management Quality:

I met with management in the past and came away very impressed overall by their dedication to the space and also their knowledge of the geopolitical landscape. From my perspective they are well positioned to continue executing and also the right fit to win government contracts.

Geopolitical Landscape:

While this is value investors club, not geopolitical investors club, it is hard to discuss a defense company without taking at least somewhat of a view on where things are heading. My view is we had a two decade aberration of largely peacetime globally, and this has likely shifted. Wars appear far more common now. Just in the last few years we have Russian Ukraine war, and now a multiple front war in the middle east. I believe it’s likely this landscape continues to worsen given the Russia China Iran axis appears poised to continue challenging the Western world order. Regardless, it’s clear many allied countries were caught off guard under-investing in defense - so this threat environment should spur a large secular boost in defense spending.

Bear Case:

The bear case has been written up previously on VIC - it is principally that AVAV products are not that impactful and somewhat commoditized. I am not a defense expert, but in speaking with management I came away thinking this is not well-founded. Further, the data seems to suggest the US military believes the products are effective - they continue to receive large US defense contracts: 

https://defensescoop.com/2024/08/28/army-aerovironment-switchblade-contract-1b-killer-drones/

Valuation:

2026 street ests are roughly $180mm, so applying a 40x multiple which is reasonable given where this has traded and Anduril trades in the private markets, gives ~30% upside from here.

Risks:

• AVAV has seen some of its recent contracts challenged - this is a dog eat dog world so AVAV’s wins are someone else’s losses.

• I am wrong about the geopolitical environment and defense spending does not secularly rise

• Issues with the AVAV products not performing up to expectations

Catalyst

• Continued contract wins

• Continued investor discovery - still a relatively under-followed name with limited analyst coverage

• M&A potential - not my base case but as AVAV continues executing it probably becomes an interesting M&A target

• Geopolitical volatility - the more volatile the geopolitical landscape remains, the better the outlook for defense spending - think of this as somewhat of a hedge for the rest of your portfolio