TLDR
- Cheap drones costing as little as $5,000–$10,000 are proving effective against billion-dollar military hardware in Ukraine and Iran
- The US Defense Autonomous Warfare Group budget is set to jump from $225 million to $55 billion in fiscal year 2027
- Four battle-tested drone stocks stand out: AeroVironment, Aevex, Red Cat Holdings, and Swarmer
- Traditional defense giants like Lockheed and Northrop saw their stocks fall during the Iran conflict
- Analysts also highlight Kratos Defense and L3Harris as strong picks in the drone supply chain
The wars in Ukraine and Iran have changed how military experts think about defense. Drones costing as little as $10,000 have held off some of the world’s most expensive military hardware. Iran’s Shahed drones shut down the Strait of Hormuz — the world’s most important oil transit route — making it too dangerous for tankers to pass.
In Ukraine, homemade drones destroyed thousands of Russian tanks and vehicles, turning a planned invasion into a years-long stalemate. The US fired hundreds of million-dollar interceptor missiles in response to drone threats in Iran, raising fears about depleted stockpiles.
These events have pushed the Pentagon to rethink its approach. President Trump has proposed a $1.5 trillion defense budget for fiscal year 2027 — about 50% higher than 2026.
The Defense Autonomous Warfare Group, known as DAWG, will see its budget explode from $225 million to $55 billion in fiscal year 2027. Analyst Louie DiPalma at William Blair estimates the US market for lower-cost drones at nearly $100 billion annually.
The Stocks Analysts Are Watching
Four drone companies have been flagged as top picks because their technology has actually been used on the battlefield.
AeroVironment has been supplying drones to conflict zones since going public in 2007. Its Switchblade loitering munitions have helped destroy Russian tanks. The company expects around $2 billion in sales in 2026, rising to $2.4 billion in 2027. Seventeen of 20 analysts covering the stock rate it a Buy.
Aevex makes the Phoenix Ghost drone, a kamikaze-style drone that can wait in the air for up to six hours before hitting a target. About 50% of its $606 million in 2026 sales come from Ukraine. Sales are still expected to grow more than 10% between 2026 and 2027 even as Ukrainian demand slows. All nine analysts covering the stock rate it a Buy.
Red Cat Holdings makes reconnaissance drones, attack drones, and drones that work without GPS. Its shares currently trade around $10.50, but Clear Street analyst Brian Dobson has a price target of $19. Red Cat has contracts with the US Army, NATO allies, and Japan.
Swarmer builds AI-based software that lets one operator control a swarm of drones. Its tech has been used hundreds of thousands of times in Ukraine missions. One analyst covers the stock with a Buy rating and a $60 price target, up from a recent $45.
Kratos Defense posted revenue growth of 22.6% in Q1 2026, with earnings up 51% year on year. Its XQ-58A Valkyrie drone is a collaborative combat aircraft designed to fly alongside manned jets. Analyst Jefferies has a price target of $80 for Kratos, more than 50% above its recent price of $51.
Traditional defense companies had a harder time during the Iran conflict. Lockheed Martin and Northrop Grumman stocks fell 18% and 14% respectively between late February and mid-June, while the S&P 500 rose 8%.
Still, analysts say manned platforms are not going away. Advanced autonomous jets and submarines remain on the military’s agenda, with established contractors expected to build many of them.
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