Modern warfare is creating demand for a different kind of weapon: smaller, autonomous, cheaper, and easier to produce at scale.
Drones can scout, strike, jam signals, or hunt other drones without putting a pilot in danger. AeroVironment reports Wednesday after the close, giving you a fresh test of how quickly that shift is becoming real revenue.
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Theme: Autonomous Drones, Loitering Munitions, Counter-UAS, Sensors, Electronic Warfare, and Affordable Defense
Quantity Is Becoming a Capability
For decades, military spending revolved around incredibly sophisticated aircraft, ships, missiles, and other platforms.
Those systems are not disappearing.
But recent conflicts have demonstrated another requirement: militaries also need large numbers of systems they can deploy quickly and afford to lose.
A relatively inexpensive drone can provide reconnaissance.
Another can carry a precision weapon.
Another can jam communications.
Then you need something that can detect and destroy the drones coming back at you.
The economics of the battlefield are changing.
Cheap Threats Need Cheap Answers
It makes little sense to regularly fire an extremely expensive interceptor at a drone costing a fraction as much.
That creates an entirely new defense problem.
The winning solution might be another drone, electronic warfare, a reusable interceptor, or even a laser.
For the companies in this basket, that means demand can come from both sides of the drone equation.
Build the autonomous systems.
Then build the systems designed to stop them.
What's Driving It
AeroVironment Is Wednesday's Main Catalyst
AeroVironment reports fiscal Q1 results after Wednesday's close, with its conference call scheduled for 4:30 p.m. ET.
It enters the quarter after a transformational fiscal year.
Fiscal 2026 revenue reached $1.98 billion, up 141%, although acquisitions contributed heavily to that growth. Full-year bookings reached $2.7 billion, producing a 1.4x book-to-bill ratio, while funded backlog finished at $1.2 billion.
AeroVironment now expects fiscal 2027 revenue between $2.125 billion and $2.225 billion.
Wednesday tells us whether the enlarged company can start turning that backlog into consistent growth.
AeroVironment Is Much More Than a Drone Maker
The BlueHalo acquisition changed the business dramatically.
AeroVironment now combines autonomous aircraft and loitering munitions with counter-drone systems, electronic warfare, directed energy, space, cyber, and other technologies.
In fiscal Q4, Autonomous Systems generated $492.4 million of revenue, while Space, Cyber, and Directed Energy contributed another $149.2 million.
That broad portfolio puts AeroVironment on both sides of the theme.
Its Switchblade systems are designed to strike targets.
Its counter-UAS products are designed to stop incoming drones.
The Contracts Are Getting Bigger
The demand is not theoretical.
AeroVironment recently received a $51 million U.S. Army order for additional Switchblade 600 loitering munitions under a broader five-year, $990 million contract.
Last week, the company also won a $464.8 million Army contract for its LOCUST high-energy laser system, marking a significant move from testing directed-energy weapons toward actual procurement.
That illustrates the broader opportunity.
More drones create demand for more drones.
They also create demand for entirely new layers of defense.
Kratos Is Building for Affordable Mass
Kratos gives you another direct look at the trend.
Q2 revenue increased 30.5% to $458.8 million, with 19.1% organic growth.
Its Unmanned Systems business generated $79.1 million of revenue, up 8.1% organically, helped by activity around its Valkyrie autonomous aircraft.
Companywide backlog reached $2.08 billion, including $1.57 billion of funded backlog.
Kratos has spent years developing aircraft designed around a very different philosophy from traditional fighter jets.
The goal is not necessarily to make each platform irreplaceable.
It is to make capable systems affordable enough to deploy in meaningful numbers.
Small Drones Are Scaling Too
Red Cat operates much further down the size spectrum.
Its Black Widow drones are designed for soldiers who need portable reconnaissance and battlefield awareness.
Q2 revenue jumped 527% to $20.2 million, driven primarily by growing drone deliveries to the U.S. Army and the start of deliveries to Japan's Ground Self-Defense Force. Gross margin improved to 16.1%.
Red Cat has also advanced in the Pentagon's Drone Dominance Program, which is focused on rapidly fielding low-cost drone systems.
The company remains tiny compared with traditional defense primes.
That is partly what makes it relevant.
Modern procurement is creating room for smaller suppliers capable of moving quickly.
The Chain Reaction
Cheap drones proliferate → battlefield surveillance increases
Autonomy improves → fewer operators can control more systems
Militaries want scale → lower-cost platforms gain attention
Drone threats increase → counter-UAS spending accelerates
Electronic warfare and lasers improve → cheaper defensive options emerge
Procurement moves slowly → promising programs can take years to become revenue
What's Working
Counter-Drone Is Becoming Its Own Industry
L3Harris recently received an Army order worth up to $106 million for its VAMPIRE counter-drone systems.
The company says VAMPIRE has already accumulated more than 350,000 operational hours supporting European combat operations.
It is also testing autonomous electronic warfare systems that can detect, analyze, and respond to electromagnetic threats with less direct human involvement.
This creates an important second layer to the theme.
The world does not simply need more drones.
It needs cheaper ways to find and stop them.
The Big Primes Are Joining In
RTX's Raytheon business has developed Coyote interceptors specifically around that problem.
Its non-kinetic Coyote can defeat drone swarms and then be recovered and reused, improving the economics of defending against inexpensive threats.
RTX is still an enormous traditional aerospace and defense company.
But even the giants are adapting to demand for cheaper, scalable systems.
What to Watch
AeroVironment Has to Prove the Acquisition Works
Revenue growth looks spectacular because BlueHalo dramatically increased the company's size.
Now watch:
Autonomous Systems growth
Bookings
Funded backlog
Switchblade demand
Counter-UAS contracts
Gross margin
BlueHalo integration
Fiscal 2027 guidance
The strongest result would show healthy demand across the portfolio without acquisition costs overwhelming profitability.
Watch Production, Not Just Awards
Defense companies regularly announce enormous contract ceilings.
That does not mean the full amount becomes revenue immediately.
What matters is funded orders, deliveries, production capacity, and backlog conversion.
The autonomous-defense opportunity looks large.
The companies still have to manufacture the equipment fast enough to capture it.
AeroVironment (AVAV)
What it does: AeroVironment builds autonomous aircraft, loitering munitions, counter-drone systems, directed-energy weapons, and other defense technologies.
Why it fits: This is Wednesday's direct catalyst and the broadest pure-play exposure to the theme.
What stands out: Fiscal 2026 bookings reached $2.7 billion, funded backlog hit $1.2 billion, and recent awards include Switchblade and counter-UAS programs.
What to watch: Bookings, backlog, Autonomous Systems growth, margins, integration, and guidance.
The Takeaway: Buy this if you want the most direct exposure to autonomous offense and counter-drone defense in one company. The risk is integrating acquisitions while scaling several businesses simultaneously.
Kratos Defense & Security Solutions (KTOS)
What it does: Kratos develops unmanned aircraft, defense electronics, rocket systems, propulsion, and other national-security technologies.
Why it fits: Kratos has built much of its strategy around lower-cost systems designed to be produced at scale.
What stands out: Q2 revenue increased 30.5%, while total backlog reached $2.08 billion and the bid pipeline expanded to $15 billion.
What to watch: Valkyrie activity, unmanned revenue, bookings, production ramps, and margins.
The Takeaway: Buy this if you want the higher-growth defense company built around affordable autonomous systems. The risk is major programs taking longer than expected to reach full production.
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Red Cat Holdings (RCAT)
What it does: Red Cat develops small tactical drones and autonomous systems for military and national-security customers.
Why it fits: It gives you direct exposure to the smallest and most rapidly deployable end of the drone market.
What stands out: Q2 revenue increased 527% as deliveries scaled to the U.S. Army and international customers.
What to watch: Army deliveries, international orders, production, gross margin, and new program wins.
The Takeaway: Buy this if you want the small-cap pure play on tactical drones becoming standard battlefield equipment. The risk is a much smaller business with thinner margins and greater contract concentration.
L3Harris Technologies (LHX)
What it does: L3Harris supplies communications, sensors, electronic warfare, missiles, space systems, and counter-drone technology.
Why it fits: Autonomous platforms become more useful when they can sense, communicate, and operate in contested environments.
What stands out: Q2 revenue increased 8%, orders reached $7.3 billion, and backlog climbed to a record $42 billion.
What to watch: Counter-UAS, electronic warfare, affordable munitions, orders, and margins.
The Takeaway: Buy this if you want a diversified defense contractor supplying much of the intelligence and electronic technology behind autonomous warfare. The risk is the drone theme representing only one part of a much larger portfolio.
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RTX (RTX)
What it does: RTX combines Raytheon's missile and defense systems with Collins Aerospace and Pratt & Whitney.
Why it fits: Raytheon's Coyote platform gives the company direct exposure to the rapidly growing need for affordable counter-drone weapons.
What stands out: Q2 Raytheon sales increased 18%, while total RTX defense backlog reached $119 billion.
What to watch: Coyote production, counter-UAS awards, defense bookings, missile capacity, and margins.
The Takeaway: Buy this if you want the large, diversified defense company adapting its portfolio to cheaper drone threats.
The risk is autonomous and counter-UAS systems remaining relatively small inside an enormous company.
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More Does Not Always Mean More Expensive
The military of the future will still need fighter jets, submarines, bombers, and sophisticated missile defenses.
It may also need enormous numbers of systems that are smaller, cheaper, and easier to replace.
AeroVironment is building the drones and the weapons designed to stop them. Kratos is pursuing affordable autonomous aircraft. Red Cat is scaling tactical drones. L3Harris and RTX are developing sensors, electronic warfare, and lower-cost counter-drone systems.
For you, Wednesday's report gets to the bigger shift:
What if the next defense advantage comes from fielding thousands of smart systems instead of a handful of incredibly expensive ones?
Best Regards,
— Adam Garcia
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