Here's why shares of AeroVironment swung wildly on Monday
The war on Iran launched by the United States and Israel sent shares of defense and drone companies higher on Monday as investors look for potential winners from a protracted geopolitical conflict in the Middle East.
The war-related rally sent shares higher in early morning trading for everything from major defense contractors like Lockheed Martin (LMT), which rose 5.5%, and Northrop Grumman Corporation (NOC), which gained 5.3%, to defense tech companies Kratos Defense (KTOS), up 6.7%, and L3Harris Technologies, Inc. (LHX), which rose 4%.
And given the Trump administration's push to grow domestic drone manufacturing to better service the US military, it's not surprising that companies in the drone sector also rallied on Monday, with Red Cat Holdings, Inc. (RCAT) surging nearly 18% and AeroVironment, Inc. (AVAV) soaring more than 20% just after the opening morning bell.
While many of the defense-related stocks gave up some of their early gains as the trading day wore on and investors began to consider some of the global macroeconomic headwinds that could arise from the war on Iran, no one suffered a swing as dramatic as that experienced by AeroVironment.
In fact, the company almost gave up all of its gains from its 20% morning rally, closing down more than 17%.
So what happened?
An article published on Monday by SpaceNews, a publication covering the aerospace industry, reported that the US Space Force is reopening a $1.4 billion program to build mobile ground stations that are used to track and command spacecraft. The program, known as the Satellite Communications Augmentation Resource (SCAR), operates under the Space Rapid Capabilities Office, or Space RCO.
The Space Force, which is the US military branch focused on protecting US and allied interests in space, had awarded the $1.4 billion contract to defense contractor BlueHalo in 2022. Under the agreement, BlueHalo would produce about 12 ground terminals called Broad Area Deployable Ground Terminal Enabling Resilient (BADGER) communications.
$1.4B contract is now threatened
Last year, AeroVironment acquired Blue Halo, bringing the $1.4 billion Space Force contract with it.
But in a regulatory filing on Jan. 16, AeroVironment noted that the US government “issued a stop work order on the company’s Other Transaction Agreement for the delivery of BADGER phased array antenna systems to support the Satellite Communication Augmentation Resource program.”
According to SpaceNews, no BADGER units have been delivered to date for the SCAR program.
The publication points out that the decision to reopen bidding on the program "reflects a broader effort by the Defense Department to diversify suppliers and reduce dependence on bespoke systems that are costly to produce."
Denise Pacioni, AeroVironment’s head of investor relations, told SpaceNews that the company is in renegotiations with Space Force.
“We’re not delivering, we’re not collecting revenue, we’re taking a pause,” she said. “We’re working with the customer to make sure that we are providing them exactly the requirements that they believe they need going forward.”
Nonetheless, BTIG analyst Andre Madrid reiterated his Buy rating on AVAV shares in a client note on Monday, seeing the selloff in intraday trading as being a bit of an overreaction to the SpaceNews article.
"White we still believe AV is in a strong position to capture future phased array demand, we note that significant headline risk remains," he said. "However, the Intraday pullback appears overdone for a contract that was initially expected to make up ~6% of annual sales."
Madrid added that he was waiting on AeroVironment's fiscal year 2026 third-quarter earnings on March 10 to gain more clarity on its negotiations with Space Force.