Top 10 Drones And Drone Warfare Stocks

Dangerous Times

Since we wrote our article “Top 10 Aerospace and Defense Stocks“, international geopolitics have kept taking a turn for the worse.

The Red Sea trade lanes are still mostly closed, the death toll of the conflict in Gaza is increasing, and tensions between Russia and NATO are still rising. Add to that the border conflict between Azerbaijan and Armenia, a possible Israel-Iran war, and mass protests over “foreign influence” in Georgia.

“This may be the most dangerous time the world has seen in decades.” – Jamie Dimon, JPMorgan CEO

Meanwhile, the trade war with China is escalating, with more sanctions on the Chinese semiconductor industry and quantum computing and 100% tariffs on Chinese cars. The question of a possible invasion of Taiwan at some point in the future remains.

Overall, markets have so far ignored these mounting risks, preferring to focus on the AI boom. Some of the leading defense ETFs have barely gone up since 2019, pre-Ukraine war.

Source: Yahoo Finance: iShares U.S. Aerospace & Defense ETF

Unmanned Warfare

The armed conflicts in Israel-Palestine, the Caucasus Mountains, the Red Sea, and Ukraine have demonstrated a very quickly changing method of warfare. Drones, both flying and on tracks, are increasingly taking over the role previously given to traditional weapons like artillery, tanks, missiles, warplanes, etc.

The victory might go toward who innovates and disrupts traditional warfare the fastest, with cheap drones and ammunition outperforming on a cost basis more advanced legacy systems.

For example, the recent attack by Iranian drones on Israel is estimated to have cost Iran around $50M-$100M. And consumed $1B to $1.5B worth of air defense systems.

Therefore, innovative drone makers, or defense companies able to counter drones in a cost-efficient manner might become the new defense giants of tomorrow.

And with the rivalry between great powers getting hotter, at the same time that traditional military systems might fail, defense spending will likely rise globally, correcting a trend of decline since the 1990s.

Source: Crescat Capital

We saw during the two years of the war in Ukraine both sides started by using civilian drones, like commercial small quadcopters, to progressively switch to custom design and military platforms.

It is almost certain that military leaders all over the world are carefully studying this development. And redesigning their procurement process towards what is proven to work in a real high-intensity war.

While civilian drone makers might also contribute, we focused this list on companies with a pre-existing military drone offering or companies with systems designed to counter drones with cheaper solutions than the current $1M a piece missiles.

Top 10 Drones, Electronic Warfare, And Defense Stocks

1. Kratos Defense & Security Solutions

Kratos is a defense company with a focus on 4 segments:

• Drones and other unmanned systems.
• Space communications.
• Cybersecurity, training, and microwave electronics.
• Command and coordination systems, or C5ISR (Command, Control, Communication, Computers, Cyber, Intelligence, Surveillance and Reconnaissance)

Source: Kratos

This puts Kratos at the core of all the more needed innovation in the modern military. Not only can it provide drones for data collection and attacks, but it can also handle data security and its integration into the command structure.

The company is also testing direct energy weapons for the US military, considered by specialists as maybe one of the only options to defend against cheap drone swarms (together with other drones and gun-based short-range air defense).

In another hot sector of military innovation, hypersonic missiles, Kratos is also at the forefront. This includes testing for extreme environment materials, radars, and even collaboration with NASA.

With the growing use of electronic warfare on the whole electromagnetic spectrum, Kratos is providing EMI/HEMP shielding and cybersecurity solutions to the US military command centers.

At last, Kratos is also involved in the development of experimental UAVs (Unmanned Aerial Vehicles), with 3 different models:

• XQ-58A Valkyrie, stealthy unmanned combat aerial vehicle.
• UTAP-22 Mako, an unmanned tactical aerial platform.
• X-61A Gremlin, for the airborne launch and recovery of groups of Unmanned Aerial Systems (UASs) from existing aircrafts.

Lastly, the company is working on driverless ground vehicles solutions, mostly for trucks.

Source: Kratos

2. AeroVironment Inc.

AeroVironment is at the forefront of the advanced suicide drones already deployed by the US military, with the Switchblade loitering ammunition (loitering refers to the ability of the drone/missile to hover in an area for a while, looking for its target, instead of the direct attack of a missile).

Source: AeroVironment

AeroVironment is also offering reconnaissance drones, 2.2kg tactical drones for infantry, the Nano Air Vehicle small enough to be held in one hand, and high-altitude pseudo-satellite (HAPS) solar gliders.

On the ground, uncrewed ground vehicles (UGVs) are used for demining, removal of IED (Improvised Explosive Devices), SWAT operations, and handling of dangerous materials.

The company even contributed to the Ingenuity Mars helicopter project; something believed to be impossible in the rarefied atmosphere of the red planet.

Source: AeroVironment

It then can integrate all these systems into a coherent AI-enhanced common control, bringing together all the autonomous systems and relevant data.

Source: AeroVironment

The loitering ammunition is the largest segment ($5B Total Addressable Market – TAM) and growing rapidly. Overall, the company grew its revenues by 40% in 2023 and expects to keep double-digit revenue growth in the fiscal year 2025.

3. L3Harris Technologies, Inc.

L3Harris is a diversified defense company with systems active in all five warfare domains (space, air, land, sea, and cyber).

L3Harris is a key supplier to the defense industry. It generated 60% of its revenues in 2022 from the US Department of Defense (DoD), 20% from international defense orders, and 20% from the civilian industries.

It sells solutions in integrated mission systems (sensors, command center, etc…), space, and communication systems. Notably, Harris controls 45% of the global tactical radios market, several times larger than the next competitor.

Source: L3Harris

The company's expertise in electronics and radio translates well into electronic warfare, a domain suddenly made crucial by the expansion of drone capabilities.

Regarding unmanned systems, L3Harris has a vertical take-off drone, the FVR-90 available, the marine autonomous boat Shadowfox (13m long), the family of underwater drones Iver, and is the prime contractor for the U.S. Navy's first major contract award for the Medium Unmanned Surface Vehicle (MUSV).

Considering the large success of low-cost maritime and underwater drones Ukraine experienced in the Black Sea, this might become a key component of the US Navy, including as a deterrence tool against China.

The company is expanding through acquisition, with the purchase in July 2023 of hypersonic missile reactor developer Aerojet Rocketdyne for $4.7B, adding a 4^th department to the company.

Due to its presence in most NATO equipment, L3Harris will likely benefit from the general build-up of new or upgraded equipment, no matter what weapon system is selected by a given nation. And it might also be ahead for maritime drones.

4. Northrop Grumman Corporation

Northrop Grumman is a defense aerospace company most famous for the creation of the iconic B-2 stealth strategic bomber, each one costing almost a billion dollars. This more than 20-year-old design is going to be replaced by the B-21, which is still in development.

The company is also at the very edge of space technology and has notably worked on the state-of-the-art James Webb Space Telescope.

Source: Northrop

The company derives most of its revenues from space and aeronautics systems, with another large segment, the mission systems division, covering a wide array of sensors, cyberdefense software, secured communication, and C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance). It is also a leading producer of ammunition, from small caliber to guided projectiles and large caliber.

Source: Northrop

The company is looking forward to its position as a supplier of advanced weapons, with the development and deployment of autonomous weapons systems like the X-47B, helicopter drone Fire Scout, surveillance drones Global Hawk and MQ-4C Triton, or future autonomous strike drones.

Source: Northrop

The company is at the edge of the development of direct energy weapons (lasers), electronic warfare, anti-drone systems, and intercontinental ballistic missiles.

Where companies like RTX and Lockheed provide the bulk of the US Air Force punch (fighter jet, missiles, air defense), Northrop Grumman is providing the most advanced capacity, from space to integrated command and stealth heavy bombers.

And maybe soon a significant part of the advanced drone, electronic warfare, and energy weapons as well.

With the growing importance of drone and electronic warfare, Northrop will likely be increasingly central to the US's both offensive and defensive capabilities, and its new stealth bombers stay a key factor in keeping pace with peer adversaries like Russia and China.

5. Textron

Textron is an aerospace company quickly expanding into the flying and ground drone markets.

The aviation segment comprises the Bell helicopters both military and civilian models, Textron Aviation‘s private jet and training aircraft, Textron eAviation, the leader in electrifying aviation since the acquisition of Pipistrel.

It also produces various specialized vehicles, from golf carts to mowers, ATVs, snowmobiles, and airport trucks.

Textron Systems is the segment in charge of drones and military systems like the Aerosonde UAS the Advanced Reconnaissance Vehicle (ARV) program, and others.

Source: Textron

It is also in charge of the surface effect cargo amphibious transport (SECAT), a 29-crew heavy cargo logistical boat that received in 2023 an “approval in principle designation”.

Acquired by Textron in 2018, Howe & Howe is another leader in ground robotic military vehicles.

This includes the SWAT-BOT, a robot with a ballistic shield, the M5 multi-role track ground robot that can do demining, carry missiles, and counter drones, and the RS2-H1 Small Ground Robotic Vehicle for difficult terrain. It also sells the civilian use US’ first commercial firefighting robot, Thermite.

So, while aviation is the core business of Textron, it has, since 2018 and even before, positioned itself to fill the gap in the supply of the US military in drones, ground robots, and naval logistics.

6. Leonardo S.p.A. (LDO.MI)

The Italian defense contractor provides many military systems used in multiple NATO platforms. Leonardo is more of a technology company that sells its products to others for integration into their finished equipment.

This makes it slightly different from larger defense companies, usually focused on selling a specific aircraft, tank, or submarine design.

Source: Leonardo

The company mostly sells to the USA, Italy, and Europe. Its business is mostly driven by procurement for helicopters and aircraft, followed by electronics (especially radars and communication tools).

Source: Leonardo

Leonardo is also starting to transform into a holding company of niche defense equipment, looking to build synergy across the portfolio and between partners.

Recently, Leonardo has acquired a 25.1% ownership in German sensor company Hensoldt, for €606M (self-funded), following the 2022 merger with Israeli RADA Electronic Industries (all-stock merger). This comes on top of multiple other participations in helicopter companies, satellite makers, and defense electronic companies.

Source: Leonardo

A key growth opportunity for Leonardo is in the counter-drone market. Its DRS’ air surveillance and Counter-Unmanned Aerial Systems (C-UAS) combine radar, short-range missiles, and auto-canon (see video) to protect from all drone threats, including quadcopters and loitering ammunitions.

These have proven in Ukraine to be devastating, even for the most advanced tanks. It also fields the SPEAR, using High Power Electromagnetic (HPEM) to fry the electronics of incoming drones, including the growing danger of drone swarms.

These systems can be added to many vehicle platforms and provide a flexible response to a quickly changing threat. In 2021, Leonardo was awarded $600M for anti-drone packages by the US Army in partnership with General Dynamics, thanks to a rapid prototyping process that took only 2 years.

The core business of Leonardo, defense electronics and avionics, is a very stable one and growing. Combined with the anti-drone systems, this could make Leonardo a quickly growing defense company. With a stock trading at a P/E ratio below 10, the company is rather cheap, and its stock price likely does not reflect its growth potential despite remarkable 3x returns since 2020.

7. Rheinmetall AG (RHM.DE)

Rheinmetall is the largest defense contractor in Germany. The country has long had a position of minimizing its armed forces after the fall of the Soviet Union. The invasion of Ukraine changed that, with Germany looking to quickly ramp up its spending to 2% of GDP, and already more than doubling its defense spending between 2014 and 2024.

Source: Rheinmetall

The company's “main products” are tanks (Leopard and, in the future, Panther), military trucks, air defense systems, and unmanned air assets (drones), with sensors and electronic systems as well.

Source: Rheinmetall

Rheinmetall is also the largest producer of artillery shells in Europe, especially the critical 155mm caliber, with facilities in Germany and South Africa, and a new one being built in Hungary.

It also produces a loitering munition (suicide drone), HERO.

The war in Ukraine has shown military planners in Europe the likely outlook a land war in Europe would take:

• Heavy reliance on artillery, with tremendous consumption of ammunition way beyond previous expectations.
• The growing importance of drones and loitering ammunition.
• Subsequently, there is a growing importance of local and mobile air defenses, not targeting expensive planes but drones and smaller/cheaper targets.

For all of these new needs, Rheinmetall is well-positioned to deliver to European armies. It is the only large European contractor that has anticipated the need for new ammunition factories.

It can also provide its HERO drone, as well as fixed or mobile, land-based or ship-based local and connected air defense. The air defense includes several gun-based systems, like the Skyranger vehicles and the Oerlikon naval gun.

Source: Rheinmetall

In Q2 2023, Rheinmetall succeeded in being selected as a finalist for the American XM30 combat vehicle program. The winner will not be announced before 2027, but this replacement of the M2 Bradley vehicle could be a game changer for Rheinmetall, with 6,785 units of its predecessor having been produced.

On a more peaceful theme, Rheinmetall is also working on hydrogen technology and has already started to receive orders for its technology in this sector. The company is also exploring the potential of civilian applications for its land drone systems, for example, an unmanned baggage handler for airports.

Due to its focus on ammunition, tanks, and air defense, Rheinmetall is very well positioned to fill the gap in European defense revealed by the Ukraine war. It will also likely benefit from new orders coming from the need to rebuild arsenals after older weapons have been sent to Ukraine.

8. Parrot (PARRO.PA)

Parrot is one of the rare drone companies for civilian use that is not based in China but instead in Europe.

Its civilian product line is focused on photography and mapping, with ANAFI Ai, “the first 4G drone”.

ANAFI USA is Parrot's drone made in America for use by the French, British, Japanese, and US government agencies, with high zoom levels and thermal cameras. The drones integrate high levels of cybersecurity, using WISeKey’s Secure Elements and a 512-bit key length for encryption.

Source: Parrot

The company is focused on using open-source systems as these tend to have less vulnerability and be more secure than closed and potentially less tested systems. The embrace of open-source philosophy also goes as far as a “Bug Bounty” program, together with YesWeHack, the first European crowdsourced security platform representing more than 22,000 cybersecurity researchers.

So, while Parrot is not a very diversified drone company (no land or maritime drone, for example, or loitering munitions), it is a leader in its niche of high-quality mapping and photography. With quadcopter drones increasingly becoming the eyes of the modern military, this could create new opportunities for the company.

9. Leidos

One sector very interested in digital transformation and cybersecurity and often lagging behind in actually performing well in that respect is public institutions and government services. This is where Leidos enters and helps them secure their digital infrastructure.

The company's activity is split between defense (57%), civil (24%), and healthcare (19%). Health was the strongest growth driver in Q2 2023 at 9% growth, followed by defense (7%) and civil (5%), for a total revenue growth of 7%.

Source: Leidos

Cybersecurity is one of the company's key activities, bringing the zero-trust concept to the public sector. While this concept is now commonly accepted in the private sector, Leidos' experience navigating the public institution structure brings extra value.

The company is also active in helping assess the impact of quantum computing, a very important question in the defense industry, where encryption and its possible breaking by quantum computing can be of vital strategic importance.

Beyond pure cybersecurity, Leidos is also active in digital transformation, cloud computing, and developing integrated systems like drone navigation, autonomous unmanned vessels, biometrics, strikes systems, space & hypersonic, and security checks, all crucial to the defense industry.

Source: Leidos

Notably, Leidos is behind the “Civilian Cloud Exchange” for government agencies and the “DoD Cloud Exchange” for military purposes.

It is Leidos systems that are behind the integration of 4 unmanned vessels in Australia's 2024 NationalMaritimeDay and also demonstrated, in collaboration with Elroy Air, autonomous aerial resupply drone for the U.S. Marine Corps.

Leidos also provides drones (as well as foot soldiers and ships) with the Assured-Position Navigation and Timing (A-PNT), assuring accurate location even if the GPD signal is jammed and multiple sensors, with the most recent a $631M contract with the US Army.

Considering the growing importance of cyber defense and the constantly growing international tensions with Russia, China, Iran, and other US “adversaries,” it is likely that companies like Leidos will be on the receiving end of growing defense and cyber defense budgets.

In addition, most federal and governmental agencies are just starting to modernize and migrate to the cloud, providing plenty of opportunity for Leidos to grow these non-defense governmental segments.

10. “Honorable Mention”: Anduril

Anduril is not publicly traded, so it may not truly be a drone stock accessible to the general public, at least not until its IPO. However, it is also one of the most discussed defense stocks, thanks to impressive innovation in the field of drones, so it deserves to be added to this list.

In part, this is because its founder is the high-profile and successful entrepreneur Palmer Luckey, the founder of the VR company Oculus later sold to Facebook.

What made Anduril so appealing to media and investors is a clear intent to “disrupt” the defense industry, looking to practice a strategy not dissimilar to Elon Musk's Tesla and SpaceX.

With investors and founders linked to SpaceX and Peter Thiel's intelligence software Palantir, this could be more realistic than many might think (and help build connections with the military and intelligence decision-makers).

The idea is to rely on first-principle innovation, open-source technology, AI, and other concepts popular in the world of tech and software to cut costs and radically speed up the often years-long (or decades-long…) innovation process in the defense industry.

This, of course, might ruffle a few feathers in the defense industry, but might be required as the adversaries of the USA are quickly leveraging the drone revolution to inflict severe costs on the US military all over the world.

It might also counter-balance the decades-long trend of consolidation in the defense industry, which is increasingly criticized for causing inefficiency, monopoly-driven excessive prices, and failure to innovate, especially from the top 5 largest defense companies.

This translates into an impressive array of products for a company founded in 2017. Notably, the Roadrunner, a reusable, vertical take-off and landing (VTOL) Autonomous Air Vehicle (AAV). It is expected to work as a reusable drone interceptor for large drones. While the price tag in the “low six-figure” is not particularly cheap, it is a lot cheaper than the currently used interception missiles costing one or several million dollars a piece.

The company will also provide fixed installations for base defenses, maritime detection systems like WISP (AI-enabled 360-degree infrared surveillance), the autonomous surveillance drone Ghost, the autonomous underwater vehicle Dive-LD (with 3D printed exterior), the loitering ammunition Altius, and bespoke solid rocket motors – SRMs.

Later down the road, Anduril is looking to develop the Autonomous Air Vehicle (AAV) Fury.

For smaller and cheaper drones, Anduril is developing an integrated threat detection for all domains at once, using AI, called “Lattice OS“, integrating software, AI, and sentry systems.

Lattice will integrate them into the smaller drone Anvil, which could destroy small quadcopters by ramming into them, bringing the interception costs to almost zero, down from the thousands of dollars, or sometimes hundreds of thousands it currently costs to intercept them (10x to 1,000x the cost of the targeted drone).

Source: Anduril