Military drone stocks plunge despite $74bn US procurement plan
A sharp selloff in military drone manufacturers is colliding with a proposed four-fold increase in Pentagon counter-drone spending, creating a potential valuation disconnect for investors.
Pure-play military drone stocks are selling off aggressively year to date, even as the Department of War requests unprecedented funding for unmanned systems. Kratos is down 38% and AeroVironment has fallen 41%, with shares changing hands at $147.03 on July 17 after dropping more than 12% that month. Recent Middle East strikes have reset loitering-munitions demand for years to come, yet equities in the sector have not priced in the windfall.
The divergence between stock prices and policy is stark. Secretary of War Pete Hegseth has signaled allocations reaching $74 billion for UAV and USV procurement in the FY2027 budget. This includes $53.6 billion for drone dominance and counter-drone technologies, alongside $20.6 billion specifically for counter-unmanned systems. That counter-drone allocation represents a 424% jump from the $3.9 billion enacted in FY2026.
For AeroVironment, the underlying business is accelerating. The company reported Q4 FY26 revenue of $641.62 million, a 133.3% year-over-year increase, beating adjusted EPS estimates of $1.47 with an actual $1.84. CEO Wahid Nawabi called fiscal 2026 "a transformational year for AV... the strongest financial performance in our history."
The operational momentum appears set to continue. Full-year FY26 bookings hit a record $2.7 billion at a 1.4x book-to-bill ratio, prompting management to guide FY27 revenue between $2.125 billion and $2.225 billion with non-GAAP EPS of $3.02 to $3.34. Wall Street analysts remain heavily bullish, with 84% maintaining a positive rating, zero sells, and a consensus price target of $245.38.
However, the market's pessimism is anchored in concrete balance sheet and execution risks. Integrating the acquired BlueHalo directed-energy business compressed gross margins from 36% to 32%. The FY26 results also posted a GAAP net loss of $265.1 million, driven almost entirely by a $240.7 million goodwill impairment.
Long-term contract viability is also under scrutiny. The termination of the SCAR program stripped $1.5 billion from unfunded backlog and triggered active securities litigation. For smaller peers like Red Cat, which saw its Black Widow drone post 849% revenue growth, the operational math remains precarious due to a $32 million quarterly cash burn. The sector's valuation gap ultimately forces investors to weigh surging top-line demand against acute integration and liquidity risks.
