Better Drone Stock: AeroVironment or eHang Holdings?

AeroVironment, Inc. (AVAV) and eHang Holdings Ltd (EH) are two of the world’s dominant companies in the aerial vehicle sector. Based in Monrovia, California, AVAV is a global leader in unmanned aircraft systems (UAS). EH, which is based in Guangzhou, China, is an autonomous aerial vehicle (AAV) technology platform company.

As drone technology has advanced, the demand for them has increased, and we believe this is likely to continue. Although the use of drones is still far from commonplace, both AVAV and EH are expected to see greater demand for their products and services in the near- to mid-term.

While AVAV has returned 77.2% over the past year, EH has gained 577.4%. In terms of the past-month’s performance, EH is a clear winner with 205.8% returns versus AVAV’s 34.2%. But which of these two stocks is a better pick now? Let's find out.

Latest Movements

AVAV announced this month that it has entered an agreement to acquire Arcturus UAV, Inc., a privately held leading provider of Group 2 and 3 unmanned aircraft systems (UAS). AVAV is to acquire the company for $405 million. The deal  is expected to accelerate AVAV’s strategy of  driving  growth and value by expanding into attractive adjacent segments and by broadening its capabilities and customer footprint. The company also agreed to acquire Telerob, a German leader in ground robotic solutions with a global footprint.

In December AVAV introduced  its Extended Range Antenna (ERA), which is a lightweight, portable antenna array kit designed to integrate seamlessly with the company’s standard RF head antenna to support a diverse range of missions. This advancement has extended the antenna’s command and control range up to 40 km. This month , EH  was  selected as a key member of the Re.Invent Air Mobility initiative to build the future urban air mobility (UAM) ecosystem in the Paris region of France as a precursor to the 2024 Olympic and Paralympic Games. Tests of the ecosystem are expected begin in June 2021 under supervision of the French civil aviation authority (DGA).

The company announced its membership in the Air Mobility Urban - Large Experimental Demonstration project on January 21.Thisis one of the largest European demonstrations of Urban Air Mobility (UAM). Throughout 2022, EH is expected to perform trial operations of the EH216, its flagship two-seat passenger-grade AAV, in three countries — Spain, the United Kingdom and the Netherlands.

EH has also forged  strategic partnerships with Zhuhai Da Heng Qin Pan-Tourism Development Co., Ltd., Zhuhai Huafa Sports Operations Management Co., Ltd. and Flying World (Zhuhai) Technology Co., Ltd. to jointly initiate UAM operations for aerial sightseeing and other air mobility services in the Hengqin New Area, in the Guangdong Province of China.

Recent Financial Results

AVAV’s top line has surged 11.3% year-over-year to $92.67 million for the fiscal 2021 second quarter ended October 31, 2020. Its product sales, which accounted for 70.7% of total revenue, increased 14.2% year-over-year to $65.53 million, and revenues from contract services increased 4.8% year-over-year. Its gross margin increased 16.2% sequentially to $40.9 million, and its non-GAAP EPS of $0.48 increased 41.2% year-over-year.

EH’s revenue for the third quarter ended September 30, 2020 increased 104.3% year-over-year to $10.45 million, driven by growth across its  main revenue streams. Its gross profit increased 120.3% year-over-year to $6.19 million. Its non-GAAP EPS was reported to be $0.02, as compared to the loss reported in the second quarter of 2020.

Expected Financial Performance

Analysts expect AVAV’s revenue to increase 10.7% for the quarter ending April 2021, and 10.3% in 2021. The company’s EPS is expected to grow 25.3% for the quarter ending April 30,2021, and 1.1% in 2021.

In comparison, , the market expects EH’s revenue to increase 19.3% for the quarter ended December 31, 2020 and 180.6% in 2021. The company’s EPS is expected to grow 660% in 2021.

Thus, EH has an edge over AVAV here.

Profitability

AVAV’s trailing-12-month revenue of $377.23 million is higher than EH’s $26.54 million. However, EH is more profitable, with a gross margin of 59.3% versus AVAV’s 40.5%.

But AVAV’s ROE and ROA of 5.7% and 5%, respectively, compare favorably with EH’s negative values.

Valuation

In terms of trailing 12-month price/sales, EH is currently trading at 150.73x, which is much more expensive than AVAV, which is currently trading at 7.56x. Moreover, EH is more expensive both in terms of trailing-12-month EV/Sales (163.97x versus 6.68x), and trailing-12-month price-to-book (101.77x versus 5.45x).

Though EH looks much more expensive than  AVAV, it may be  worth paying this premium considering EH’s significantly higher earnings growth potential.

POWR Ratings

AVAV and EH are rated Buy in our proprietary POWR Ratings system. Here are how the four components of overall POWR Rating are graded for AVAV and EH:

Both AVAV and EV have an A for Trade Grade and Peer Grade, a C for Buy & Hold Grade, and a D for Industry Rank. AVAV is currently ranked #22 of 72 stocks in the Air/Defense Services industry, while EH is ranked #19 in the same industry.

The Winner

Both AVAV and EH are good investment bets considering their market dominance and continued expansion. However, EH appears to be a better buy despite trading at a marginally higher valuation based on its higher revenue and earnings growth potential.

Want More Great Investing Ideas?

9 “MUST OWN” Growth Stocks for 2021

#1 Ingredient for Picking Winning Stocks

7 Best ETFs for the NEXT Bull Market

5 WINNING Stocks Chart Patterns

EH shares were trading at $71.97 per share on Thursday afternoon, down $8.03 (-10.04%). Year-to-date, EH has gained 240.93%, versus a 1.98% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

More...