The world of defense technology is heating up, and drone manufacturers are soaring to new heights — none more so than AeroVironment (AVAV). In recent years, this once-under-the-radar defense tech firm has been capturing investor attention, driven by surging demand for its advanced uncrewed aircraft systems (UAS) and loitering munitions. However, AeroVironment’s latest catalyst is even more compelling: a massive defense spending commitment from NATO.

At a recent summit, NATO members pledged to increase defense budgets to 5% of GDP by 2035, up dramatically from the previous 2% target. Defense analysts and investors quickly honed in on the potential winners of this monumental shift. One name stood out: AeroVironment.

In this article, we’ll explore how AVAV is set to benefit from the NATO pledge, analyze its recent financial performance, and assess whether this red-hot drone stock still has room to fly higher.

With a market cap of $11.7 billion, AeroVironment (AVAV) stands out as a prominent player in the defense technology industry. The company is known for its UAS, which include small- and medium-sized drones, along with its Kinesis command and control software. It also offers counter-UAS and loitering munitions solutions, providing modern warfighters with precision firepower and real-time intelligence.

Shares of the defense technology company have rallied 55.1% on a year-to-date basis.

BTIG analyst Andre Madrid stated in a report last week that NATO’s sweeping new defense spending pledge could almost double the market for U.S. defense contractors over the next 10 years. At the June 24-25 NATO summit in the Netherlands, all member nations except Spain agreed to increase defense spending to 5% of gross domestic product by 2035, up from the previous 2% target. Of that total, 3.5% is designated for core defense areas such as equipment, personnel, and operations, while the remaining 1.5% is allocated to infrastructure and defense industrial capacity.

BTIG’s Madrid projected that NATO defense budgets could reach $3 trillion per year by 2035, with up to $8.8 trillion in total military equipment spending over the next decade if current trends continue. For U.S. defense firms, this translates into a $2.7 trillion export opportunity — nearly twice the $1.4 trillion potential had spending remained at 2% of GDP. “The higher defense pledge could nearly double the addressable market for U.S. contractors,” the analyst wrote.

U.S. companies currently make up about two-thirds of Europe’s military equipment imports, a share Madrid anticipates will remain stable. Within BTIG’s coverage, Madrid highlighted AeroVironment and several other companies as well-positioned to benefit. During AVAV’s Q4 earnings call, held a day before NATO’s 5% defense spending pledge, Madrid asked about the potential impact of the initiative. AeroVironment CEO Wahid Nawabi stated that the company is well-positioned to meet the rising demand in Europe, thanks to its reliable and scalable systems and established presence.

Notably, on June 27, BTIG’s Madrid raised the firm’s price target on AVAV stock from $225 to $300 while maintaining a “Buy” rating, arguing that the company’s valuation remains attractive despite its strong YTD rally. The analyst pointed out that, based on estimated enterprise value, AeroVironment is trading at around 8x projected 2025 pro forma sales — significantly lower than the double-digit sales multiples often seen among private defense tech peers.

On July 1, AVAV stock tumbled more than 11% following the company’s announcement of two public offerings to raise capital. The company issued 3.52 million shares at $248, raising $875 million, and also secured $650 million through 0% convertible notes due in 2030, with a conversion price equivalent to $322.40. The $1.47 billion in net proceeds will be used to pay down $965.3 million in debt under the term loan and revolving credit facility, with the remaining funds allocated to expanding manufacturing capacity. Many analysts and investors tied this capital raise to the recent BlueHalo acquisition, which carried $770 million in gross debt, suggesting it will need to deliver significant value to justify the dilution.

On June 26, AeroVironment announced that its Wildcat UAS reached several key development milestones as part of the Defense Advanced Research Projects Agency’s (DARPA) Early VTOL Aircraft Demonstration (EVADE) program. Wildcat has successfully completed VTOL-to-forward-flight transitions, validated its core flight and propulsion systems, and started integrating key mission payloads, marking swift progress toward achieving an operationally relevant capability.

On June 25, AeroVironment stock jumped more than 21% after the company reported record revenue, bookings, and profits for the fourth quarter and full year, driven by soaring demand for its uncrewed and loitering munitions systems.

The defense technology firm reported quarterly revenue of $275.1 million, up 40% year-over-year, making it the strongest quarter in the company’s history. Its annual revenue grew 14% year-over-year to $820.6 million, surpassing the upper end of initial guidance and marking the fifth consecutive year of double-digit revenue growth. CEO Nawabi attributed the strong results to growing global demand for AeroVironment’s portfolio of UAS and loitering munitions.

The company’s Q4 gross profit climbed 33% year-over-year to $100.3 million, as scaling benefits offset an accelerated intangible amortization expense, resulting in a record adjusted EBITDA of $61.6 million. Adjusted EBITDA for the full year was also a record $146.4 million. Fourth-quarter net income nearly tripled to $16.7 million, despite an $18.4 million non-cash UGV goodwill impairment, while full-year net income stood at $43.6 million.

Meanwhile, the company secured a record $1.2 billion in total bookings throughout the fiscal year, a strong signal of future business growth. This contributed to a funded backlog of confirmed, contracted future revenue that reached $726.6 million, nearly doubling from the prior year.

Keep in mind that AeroVironment’s fiscal year ends in April, so the results do not include any contributions from the BlueHalo acquisition, which closed in May, and instead reflect only the company’s operational success.

Looking ahead, management provided highly confident guidance for fiscal 2026, projecting revenue between $1.9 billion and $2 billion, driven by the first full-year contribution from BlueHalo. That represents a 137% year-over-year increase at the midpoint. Adjusted EBITDA is expected to more than double, ranging from $300 million at the low end to $320 million at the high end.

Analysts tracking the company expect its adjusted EPS to remain largely unchanged year-over-year at $3.23 for fiscal 2026, while revenue is estimated to surge 145.27% from the previous year to $2.01 billion.

From a valuation standpoint, AVAV stock doesn’t look cheap. The stock trades at 78.3x forward adjusted earnings and has a forward EV/EBITDA multiple of 37.16x — both well above the sector medians and its historical averages. The war in Ukraine underscored the critical role of drones in modern warfare, likely contributing to higher valuation multiples for drone manufacturers. However, NATO’s new defense spending pledge, along with the increasing importance of drones, makes me believe the premium is justified.

Wall Street analysts are very bullish on AeroVironment stock, as reflected in the consensus “Strong Buy” rating. Out of the nine analysts covering the stock, eight recommend a “Strong Buy” and one gives a “Moderate Buy” rating. The average price target for AVAV stock is $274, indicating upside potential of 16.1% from current levels.

On the date of publication, Oleksandr Pylypenko did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com