AeroVironment (NASDAQ: AVAV) stock fell 5.1% through 10:10 a.m. ET Tuesday after investment bank Jefferies lowered its rating on the manufacturer of military drone aircraft.

Reports indicate that Jefferies analyst Greg Konrad downgraded AeroVironment stock from buy to hold primarily on valuation concerns, citing the stock’s 87% increase in share price so far this year.

The effect of the “post-Trump bump”

Konrad sees “improving fundamentals” driving AeroVironment’s gains — and they are. Sales grew 33% in fiscal 2024, and were up another 25% in the first quarter of this fiscal year. Gross profit margins are entering their third straight year of expansion, and operating and net margins are firmly positive. Konrad also credits a “post-Trump bump” for boosting AV shares, on anticipation of greater military spending under the new administration.

Albeit, the last administration has already been pretty kind to AV — I mean, did you see those revenue growth numbers? So if the Trump administration is even better, it would be more a matter of degrees than any reversal of a negative trend.

Is 34 times EBITDA too much to pay for a defense stock?

Perhaps that’s part of Konrad’s hesitance to recommend buying AeroVironment stock at its current valuation of 34 times earnings before interest, taxes, depreciation, and amortization (EBITDA) — roughly twice the valuation of other, larger defense stocks such as Lockheed Martin or General Dynamics. When you consider furthermore that defense stocks in general look overvalued today, the fact that AeroVironment shares cost twice what everyone else is selling for is, in fact, cause for concern.

By my calculations, AeroVironment stock costs more than 8 times trailing sales, more than 110 times trailing earnings, and more than 180 times trailing free cash flow. No wonder that Jefferies suggests investors wait for “a more attractive entry point” before buying any more AeroVironment stock.

The only thing I’d add is that you might have to wait a very long time before these shares become cheap enough to buy.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AeroVironment and Jefferies Financial Group. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.