Drone stocks slump as $75bn Pentagon pivot swells backlogs
Drone stocks have slumped in 2026, but record funded backlogs and a $75bn Pentagon pivot to unmanned systems signal robust future revenue.
Shares in leading U.S. drone manufacturers have fallen sharply in 2026, but their swelling order books tell a different story. AeroVironment, Red Cat Holdings, and Kratos Defense are all trading well below recent peaks. However, record-breaking and heavily funded backlogs suggest the selloff has created a disconnect with underlying business momentum.
Two structural shifts are driving this divergence. Western governments are actively replacing Chinese technology with domestic supply chains. Simultaneously, the Pentagon is accelerating its transition to unmanned systems. The 2027 defense budget request includes nearly $75 billion specifically for unmanned platforms and counter-drone technology.
AeroVironment lost a $1.7 billion contract, knocking its shares down from a 52-week high of $417.86 to $144.58. Yet, the company closed its fiscal fourth quarter with a $1.2 billion fully-funded backlog and a 1.4 book-to-bill ratio. New business is already offsetting the shortfall, highlighted by a $500 million counter-drone contract from the Domestic Shield Program. Institutions own over 85% of the stock and are buying at a better than 2-to-1 pace.
Red Cat is navigating a direct Chinese ban on critical component exports. Rather than cutting production, the company is transitioning to NDAA-compliant parts. It has secured hundreds of millions in potential contracts, including a 173-system order from Japan’s Ministry of Defense. While share dilution has weighed on the stock, analysts see roughly 125% upside to a $21.40 consensus target.
Kratos Defense carries a high valuation, trading at a 283.47 price-to-earnings ratio as its stock dropped from $134 to $48.19. Its growth profile, however, remains intact. Backlog exceeded $2 billion at the end of the first quarter, with 72% of it funded. Analysts project revenue growth will sustain a 20% pace for at least four years, which should eventually compress its premium multiple.
All three stocks face near-term volatility from budget timing and macroeconomic pressures. But with consensus analysts projecting outsized upside across the sector, upcoming earnings reports could force a market reappraisal if backlogs continue to expand.
