AeroVironment, a military drone manufacturer, has secured its largest defense contract to date, valued at $990 million. This is a significant milestone since AeroVironment's initial public offering in 2007. The contract was announced in the Pentagon's daily update on August 27, which highlighted AeroVironment's selection to provide an organic, stand-off capability for dismounted infantry formations. This system is designed to destroy tanks, light armored vehicles, hardened targets, and personnel.

The contract is primarily centered around the Switchblade 600 loitering munition system. This unique weapon, which launches from a tube similarly to a mortar, boasts impressive specifications. It can fly at speeds of up to 125 mph and strike targets up to 25 miles away. Weighing 65 pounds, half of its weight is attributed to its warhead. AeroVironment promotes the Switchblade 600 for its high-precision optics, 40 minutes of loitering endurance, and effective anti-armor capabilities.

While the contract doesn't explicitly mention the Switchblade 600, it is clear that this is the primary product the Army intends to acquire. This single contract is worth more than AeroVironment's combined revenue for 2022 and 2023, according to S&P Global Market Intelligence. It's also 38% larger than the projected revenue for fiscal 2024.

Though the $990 million contract will be executed over five years, it translates to an annual revenue boost of $198 million. This could result in a 28% increase in annual revenue, nearly double the 16% growth that Wall Street had anticipated. With AeroVironment's current net profit margin at 8%, this could mean an additional $0.59 per diluted share per year, and potentially more if production scales efficiently, bringing profit margins back to 2019 levels. For a company that earned $2.18 per share last year, this is substantial.

But is AeroVironment stock a buy right now? That's a bit uncertain. With a $192 share price and current earnings of $2.18 per share, the stock trades at 88 times trailing earnings. Adding the potential $0.59 per share profit still values the stock at over 69 times earnings, and even a full dollar bump still places it at 60 times trailing earnings. These valuations are steep, even with a 28% growth rate.

Additionally, AeroVironment's free cash flow has been negative for the past three years. Analysts predict a return to positive free cash flow by 2025, and last week's contract win supports this forecast. However, it won't be until 2026 that the company might reach $100 million in real free cash flow. With a current market cap of over $5 billion, the stock's valuation remains high.

In conclusion, while this contract is a major win for AeroVironment and highlights its capabilities, the company needs to secure additional contracts and grow its profits and free cash flow faster before its stock becomes a more attractive investment.