AeroVironment Q2 FY26 Earnings Preview: Defense Boom vs Downside Skew

1. Market & Expectations

AeroVironment heads into its Q2 FY26 print (for the quarter ended Nov 1, 2025) with a roughly $13.8B market cap and shares around $283. Our options snapshot shows the stock up about 76% over the last year and ~81% year-to-date, but down roughly 20% over the past month. Price is still ~177% above the 52-week low near $102, yet about 32% below the early-October high around $418. The long-term story is a sharp re-rating and growth, with the recent drawdown reflecting some de-risking into a big event.

On valuation, trailing fundamentals are noisy because of the BlueHalo acquisition and integration costs: TTM EPS is negative, net margin sits around -4%, and P/E on trailing numbers is not meaningful. Revenue growth, however, is strong: trailing revenue growth is ~44% with year-over-year growth in the mid-teens even before the step-function ramp expected this year. The stock trades at about 7.8x TTM sales and ~2.9x book, a premium multiple even for defense, but more in line with high-growth mission-critical contractors than traditional primes.

Street expectations for Q2 FY26 are high. Consensus points to EPS roughly in the $0.82–0.87 range on revenue around $466–$477M, implying ~150% year-over-year growth off last year’s smaller base and a step up from Q1 FY26’s $454–455M. Analysts expect product sales to roughly double and contract services to more than triple versus the prior year, with both the Autonomous Systems and Space/Cyber/Directed Energy segments contributing meaningfully. Over the last month, the consensus EPS estimate has been nudged down by about 1½%, a mild negative revision that slightly lowers the bar but doesn’t remove it.

History says this is a true event name. Recent one-day post-earnings moves have been large and two-sided: roughly +7%, +16%, –4%, and –16% across the last four quarters, for an average absolute move around 11%. That’s consistent with the narrative of a high-beta defense growth stock whose reactions depend heavily on guidance tone and backlog commentary rather than just the headline EPS line.

2. Business & Balance Sheet

AeroVironment’s story is now about scaled, multi-domain defense exposure rather than just small UAVs. The two major segments are:

• Autonomous Systems – Switchblade and Puma tactical drones, loitering munitions, and related systems that have seen elevated demand from Ukraine, NATO, and U.S. programs.
• Space, Cyber and Directed Energy – High-growth platforms like space laser communications, missile defense, and counter-UAS directed energy, many won via large multi-year programs.

The BlueHalo acquisition, completed earlier in 2025, materially expanded AVAV’s footprint in high-end defense tech and contributed to a funded backlog around $1.1B and a much larger unfunded pipeline. Management has framed FY26 as a “scale-up year,” with full-year guidance for $1.9–$2.0B in revenue and non-GAAP EPS of roughly $3.60–$3.70. That implies continued high growth and margin expansion over the next few quarters, but also leaves less room for hiccups.

The balance sheet is a source of comfort. With a current ratio near 6, quick ratio just under 5, and debt-to-equity around 0.18, liquidity is strong and leverage modest despite the recent convertible issuance. There’s no dividend, and capital allocation has been tilted toward M&A and capacity for large programs rather than cash returns. Return on equity and assets are still negative on a trailing basis, reflecting integration expenses and the lag between heavy investment and normalized earnings power.

For this print, the key fundamental swing factors are:

• Margins vs Mix: Prior quarters showed huge revenue beats paired with EPS misses as service mix and early-stage investments weighed on margins. If Q2 shows gross margin stability and better operating leverage, the Street can look through noisy GAAP numbers. If margins compress further, investors may question the earnings power behind the big backlog.
• Backlog and Bookings: With visibility already high, incremental upside will depend on further large contract wins or upgrades to backlog quality (e.g., more funded vs unfunded).
• Guidance Trajectory: Management already raised full-year EPS guidance after Q1 while maintaining the revenue range. Repeating a large raise is harder; simply reiterating guidance may be “good” fundamentally but not enough to excite a market that has already rewarded the story.

Overall, the business momentum is strong and the balance sheet is solid, but near-term earnings quality and guidance tone are the critical variables for the reaction.

3. Options & Sentiment

Our AVAV options snapshot (as of Dec 8, 2025) paints a classic high-stakes earnings setup.

• Event straddle & implied move:

  • Using the 12/12 expiry (4 days out, the first expiry fully spanning the 12/9 AMC print), the 282.5 strike call mid is about $17.50 and the matching put mid is about $16.85.
  • That puts the at-the-money straddle around $34.35 versus a spot price of $282.74, implying an expected ±12.1% move into Friday.
  • By comparison, the last four one-day post-earnings moves averaged ~10.8% in absolute terms, so options are pricing a move somewhat larger than recent realized, but not wildly so. With 30-day realized volatility around 50% annualized and the short-dated event IV near 145%, traders are paying a rich premium for the earnings risk.

• Skew and positioning:

  • For the 12/12 expiry, out-of-the-money puts (strikes below ~270) carry an average implied vol around 176%, versus about 157% for OTM calls (above ~295). The 12/19 expiry shows even stronger skew, with OTM put IV around 169% versus ~114% for OTM calls.
  • Front-week open interest skews bearish: total put OI is ~1,950 vs ~1,678 for calls, and in the 250–320 region near spot, puts (~1,234 OI) outnumber calls (~583 OI) by more than 2:1. The heaviest near-money put concentrations sit at 280 and 272.5, while the largest call OI is far OTM at 405–410, likely leveraged upside speculation.
  • Volume tells a similar story, with more flow in puts than calls on the front week.

This profile looks more like defensive hedging plus tail-risk demand than euphoric upside chasing. With a big YTD run and a 20% pullback already in place, investors appear willing to pay up for downside protection against a guidance or margin disappointment, while still sprinkling out-of-the-money calls to preserve upside if the story over-delivers.

On the Street, though, the tone is still bullish. Most covering analysts carry Buy or Outperform ratings, and average 12-month price targets cluster around the mid-$350s to low-$360s, implying roughly 25–30% upside from the current price. Several firms have recently reiterated bullish views or initiated with high targets, even as one or two houses have trimmed previously aggressive objectives. At the same time, factor-driven research (e.g., Zacks) flags negative EPS revisions (~–1.6% over 30 days) and a negative “earnings surprise” backdrop, with only one EPS beat over the last four quarters.

Netting it out, the options tape leans cautiously bearish into the print, while the fundamental analyst community remains structurally optimistic on the multi-year story.

4. Guidance, Direction & Confidence

Scenario map

Given the mix of rich but slightly off-the-highs valuation, huge growth expectations, and downside-skewed options, we frame three broad paths for the earnings reaction:

1. Bull case (~30% probability):

   • Revenue materially beats consensus (e.g., >5% above), margins stabilize or improve, and management nudges FY26 EPS guidance higher again or tightens the range toward the top end.
   • Backlog and bookings commentary reinforces a multi-year growth runway across both segments with clean execution.
   • Hedged longs unwind, OTM calls pay off, and the stock gaps up in the low-teens (%), potentially retracing a meaningful portion of the recent 20% drawdown.

2. Base case (~56% probability):

   • Revenue lands near consensus with only a modest beat, EPS is roughly inline to slightly light as service mix and integration costs still weigh, and FY26 guidance is reaffirmed but not meaningfully raised.
   • The story remains fundamentally intact, but there’s limited “new news” to justify re-rating after a big YTD run and earlier guidance hike.
   • The market reacts with a downside gap in the mid-single to high-single digits, followed by some intraday chop as vol sellers step in. Implied ±12% proves too rich, with realized move closer to ~8%.

3. Bear case (~14% probability):

   • A clean EPS miss coupled with softer commentary on margins, execution, or funding timing, and/or guidance that is lowered or de-risked to account for integration and contract timing.
   • In this scenario, the elevated valuation and crowded longer-term long base become headwinds, put buyers are rewarded, and shares could trade down in the mid-teens percentage range or worse.

Simple factor model & weights

To formalize the call, we ran a very simple four-factor scoring model over historical AVAV reactions and similar high-growth defense names, then applied it qualitatively to this setup. The factors and approximate weights we’re using for this print are:

• Estimate revisions & growth (weight ~0.35): small negative revisions (–1.6% EPS) vs very strong expected revenue growth and prior guidance raise — net mildly negative for an upside surprise.
• Options skew & positioning (weight ~0.30): rich straddle pricing and pronounced downside skew, plus heavier near-money put OI and volume, tilt the tape toward a cautious or negative reaction.
• Valuation vs history/peers (weight ~0.15): still-premium sales multiple and negative trailing earnings keep the bar high, even after the recent pullback.
• Price action, macro & special factors (weight ~0.20): strong 1Y/YTD trend, powerful defense tailwinds, and a 20% pre-earnings drawdown argue for some relief potential if results are simply “good enough.”

Encoded as normalized scores and passed through a logistic-style aggregation, this setup points to roughly 54% odds of a down gap vs 46% for an up gap. Given the particularly heavy short-dated put skew in both the weekly and monthly expiries, and the risk that a mere reiteration of guidance disappoints a loyal bull base, we tilt our formal call slightly further toward the downside.

Base-case decision

• Expected fundamental outcome: roughly inline EPS with a small revenue beat, and steady FY26 guidance rather than another upgrade.
• Expected earnings gap: down, on the order of 8% vs the pre-print close — a meaningful move but smaller than the ~12% priced by the weekly straddle.
• Direction confidence: we assign about 56% probability that the opening gap is down rather than up.

That maps to:

• Gap direction: down
• Gap magnitude (absolute): ~0.08 (8%)
• Direction confidence: 0.56

Upside and tail risks are real: a clean margin story plus another guidance raise could easily trigger a double-digit squeeze higher. But combining high expectations, premium valuation, cautious factor models, and a downside-skewed options surface, we think a modest-confidence down call is more defensible than leaning into an upside gap.

5. Trade Framework (examples, not advice)

All structures below are illustrative, based on the current options snapshot and the base-case view of a down move smaller than the implied ±12%. Sizing and risk management are critical.

1. Directional: short-dated bear put spread (12/12 expiry)

   • Example: Buy 280 put / Sell 250 put.
   • The 280 put mid is around $15.55; the 250 put mid about $4.60 in our snapshot. The spread costs roughly the high-single to low-double digits ($11–12) and risks that debit to target up to $30 of intrinsic value if shares trade at or below $250 by Friday.
   • This structure directly expresses the base case (an 8% down move puts the stock around $260), with limited downside if the stock squeezes higher and an embedded vol short vs the full straddle.

2. Mildly bearish / “fade the rip”: short call spread (12/12 expiry)

   • Example: Sell 300 call / Buy 330 call.
   • The 300 call mid is around $11.10; the 330 call is much cheaper. A 300/330 call spread can bring in a mid-single-digit credit while capping risk to the 30-point width minus that credit.
   • This suits traders who think the stock is unlikely to finish the week above ~$300–310 even if the initial reaction is positive, while avoiding naked short calls.

3. Short-vol / range-bound expression: defined-risk iron condor

   • Example: Sell 250 put / Buy 230 put & Sell 315 call / Buy 335 call for 12/12.
   • This targets a post-earnings range roughly between the low-$250s and mid-$310s, harvesting some of the ~12% implied move on both sides while keeping wings further out for tail protection.
   • Best case, AVAV gaps and settles within that range and implied volatility collapses; worst case, a large move beyond either wing realizes the tail risk. Traders using this approach should be comfortable with gap risk and net short gamma.

Key risks to all of these structures include: a much larger-than-expected move (either direction), guidance or geopolitical headlines overshadowing the numbers, and the possibility that post-earnings realized volatility still matches or exceeds the implied move (e.g., on a multi-day trend or reversal after the open).

6. TL;DR

AVAV goes into Q2 FY26 earnings with surging defense demand, a record backlog, and strong long-term analyst support, but also premium valuation, slight negative EPS revisions, and a heavily downside-skewed options surface. The weekly at-the-money straddle implies about a 12% move, slightly above the stock’s ~11% average one-day earnings swing, with puts commanding a clear volatility premium over calls.

Our base case is roughly inline results and steady guidance, translating into a downside earnings gap of about 8% versus the pre-report close, with ~56% confidence that the opening move is lower rather than higher. In that setup, risk-defined bearish or short-vol structures that don’t pay full freight for the straddle look more attractive than outright upside bets, while acknowledging that a clean margin story plus another guidance raise could still trigger a sharp squeeze higher.