quick read
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Despite some significant declines this year—41% for AVAV and 38% for KTOS—the fiscal year 2027 defense budget proposes $74 billion for UAV and USV purchases.
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Red Cat’s Black Widow drone saw an impressive 849% revenue growth year over year, yet it faced a quarterly cash burn of $32 million, which makes it essential to approach investments carefully.
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Now might be the time to act. Analysts who correctly predicted NVIDIA’s rise back in 2010 have just named their top 10 AI stocks, and AeroVironment isn’t among them.
As drone warfare transitions from a specialized capability to a central focus of U.S. defense strategy, the current landscape for military drone stocks appears quite appealing. The Army’s fiscal year 2027 budget request allocates $53.6 billion for drone control and counter-drone technology, alongside another $20.6 billion for counter-unmanned systems—an incredible 424% increase over the fiscal year 2026 budget of $3.9 billion. Secretary of the Army Pete Hegseth has signaled potential funding of up to $74 billion for UAV and USV procurement. Recent conflicts in the Middle East have only heightened the demand for loitering munitions for the foreseeable future.
However, three key military drone companies in the U.S. have experienced considerable drops this month, opening up investment opportunities before the 2027 budget is finalized. Each company plays a unique role in the unmanned combat sequence and carries its individual risks that investors should keep in mind.
Aviation environment (AVAV)
AeroVironment (NASDAQ:AVAV) has positioned itself as a front-runner in loitering weapons, bolstered by the Switchblade system and its acquisition of BlueHalo’s directed energy capabilities. As of July 17, its stock traded around $147.03, reflecting a drop of over 12% within the month and around 43% for the year—this, even as its fundamentals appear strong.
In the fourth quarter of 2026, the company reported a substantial 133.3% surge in revenues year over year, reaching $641.62 million, with adjusted earnings per share (EPS) hitting $1.84, outpacing the consensus estimate of $1.47. Their fiscal year 2026 bookings reached a record $2.7 billion, with a management forecast for fiscal year 2027 revenues between $2.125 billion and $2.225 billion, and non-GAAP EPS between $3.02 and $3.34. CEO Wahid Nawabi described 2026 as “a transformational year for AV,” noting it as the best financial performance recorded.
Now is the time to act: Analysts, who accurately predicted NVIDIA’s trajectory in 2010, recently released their top 10 AI stocks—and AeroVironment didn’t make the cut.
Analysts maintain a positive outlook, with 84% advising to sell, but the consensus price target for the stock is currently set at $245.38.
Risk: The amortization from acquisitions has led to a compression of gross margins from 36% to 32%, with a goodwill impairment of $240.7 million resulting in a GAAP net loss of $265.1 million for fiscal year 2026. The cancellation of the SCAR program removed $1.5 billion from unfunded backlogs, posing significant integration risks.
Kratos Defense & Security Solutions (KTOS)
Kratos Defense & Security Solutions (NASDAQ:KTOS) specializes in jet-powered tactical drones with products like Valkyrie, and benefits directly from the Department of Defense’s $4.5 billion autonomous funding due to a unique role in various cooperative fighter programs. As of July 17, the stock was around $47, suffering a nearly 41% decline since previously peaking at $130.72 in January 2026.
In its first quarter of 2026, Kratos reported revenue of $371 million, marking an increase of 22.6% year over year, alongside a 30.9% organic growth in unmanned systems. Bookings reached $605.2 million, leading to a 1.6x sales growth and a backlog of $2.01 billion. Management has increased their fiscal 2026 revenue outlook to between $1.7 billion and $1.76 billion. CEO Eric DeMarco emphasized the importance of their role in reshaping America’s defense landscape.
Kratos aims to produce about 40 Valkyries annually by 2027, and Northrop Grumman has chosen Valkyrie for its MUX TACAIR CCA project. Analysts largely agree, with 17 ratings of buy or strong buy, and a consensus price target of $109.86.
Risk: The company anticipates free cash flow losses ranging from -$85 million to -$105 million against projected capital expenditures of $155 million to $165 million, combined with a forward P/E ratio near 80 and stock-based earnings of $15 million compared to $8.7 million a year prior. It requires precise execution to evaluate this investment.
Red Cat Holdings (RCAT)
Red Cat Holdings (Nasdaq:RCAT) exhibits high risk as a speculative option. Their Black Widow ISR drone has successfully secured a contract for short-range reconnaissance with the U.S. Army. The company updated its short- to medium-term revenue target to between $150 million and $180 million. As of July 17, the stock was around $7.84, having dropped nearly 30% recently, though business development is on the rise.
The first quarter of fiscal 2026 reported revenues of $15.47 million, which is an incredible 849.3% increase year over year. The gross margin improved from -52.1% to 12.7%, and the company currently holds $131.9 million in cash following a stock sale worth $225 million. New orders for Black Widow drones have come from NATO countries and a partner in the Asia-Pacific.
CEO Jeff Thompson highlighted the broader trends, stating, “With 2026 shaping up to be a landmark year for Redcat…Secretary Hegseth has indicated funding up to $74 billion for UAV and USV procurement…Our factories serve as weapon production sites.” Analyst coverage remains sparse, but all current analysts have a bullish outlook—rating the stock as a Buy or Strong Buy, with a consensus price target of $22.
Risk: Red Cat has a significant cash burn, posting an operating loss of $27.3 million in the first quarter and a quarterly cash burn of $31.95 million. The share count has expanded to 120.8 million from 85.5 million last year, with inventory rising to $62.7 million. The pending acquisition of Quaze Technologies is still under the Investment Canada Act review, emphasizing the importance of careful investment sizing.
What to watch next
All three companies currently seem disconnected from a defense budget outlook that’s notably more favorable than it was six months ago. Proceeds from the fiscal year 2027 budget will start being realized this fall. The upcoming earnings reports from Kratos and AeroVironment will provide insights into whether their record book balances are sustainable. If the booking trends persist, the current market declines could be seen as a valuable opportunity.
