We're approaching a new era of defense, one that will use AI-enabled military drones that can run without a human operator. And it's a huge source of U.S.
government funding that's set to benefit various companies. Unmanned systems — which refer to platforms across air, land, sea and space that function remotely or autonomously using AI or some other form of pre-programmed technology — are a growing focus for the U.S.
Department of Defense. That's due to increased global human conflicts, as well as the rise of AI technologies and ongoing security efforts in the Indo-Pacific region , according to BTIG vice president and analyst Andre Madrid. "The DoD is currently undergoing a generational transformation of its unmanned fleets .
.. Recent conflicts in Nagorno-Karabakh, Ukraine, and the Middle East have proven the invaluable impact of unmanned systems, which extends well beyond just the aerial domain," Madrid said in a recent note, adding that there's still a funding focus on both high and low-tech systems.
According to BTIG, the DoD requested $5.3 billion in fiscal year 2025 for unmanned systems, most of which is directed at procurement programs. The firm forecasts the DoD's entire unmanned funding requests to grow at a 9.
5% compound annual growth rate through fiscal year 2029. Most of those requests are coming from just one program: the Collaborative Combat Aircraft, or CCA, program that's tucked within the Air Force's Next Generation Air Dominance initiative designed to maintain U.S.
air dominance in future conflicts. The CCA is aiming to develop a new generation of AI-enabled, lower-cost unmanned combat aerial vehicles, also known as UCAVs or military drones, to work alongside and enhance the capabilities of manned fighter jets. The U.
S. Navy is currently the largest beneficiary of the DoD's funding request as it's the greatest spender, with most of the money being used for aerial drones and sea-based vessels, Madrid said. But the U.
S. Air Force is expected to see the most funding growth over the next five years, he added, noting that the Pentagon expects the Air Force's unmanned funding to grow at a 34% annual rate between fiscal year 2024 and fiscal year 2029 — with that growth being entirely driven from the CCA program. "The Department of Defense is really thinking about how they can leverage unmanned technology and autonomy to accomplish a lot more missions in the near future," Madrid said.
"A lot of people look at unmanned technology as just the hardware and they neglect to consider the brains of it that might be going into it, which is also a huge focus item of the DoD ...
Traditionally, the DoD has never really procured software at this scale before." "They've never really procured anything of this sort," he added. Stocks to play the trend According to Madrid , companies that are expected to benefit from heightened unmanned systems spending include AeroVironment , General Dynamics , Kratos Defense & Security Solutions , Northrop Grumman and Lockheed Martin .
Other analysts, including Morgan Stanley analyst Kristine Liwag, have gotten more optimistic on the broader defense sector after its underperformance last year, which was driven by supply chain and inflationary concerns, as well as worries that U.S. defense spending would slow down.
"Defense may prove defensive in the current market environment as geopolitical tensions remain elevated," Liwag said in a recent note. Major American weapons manufacturer Northrop Grumman is one of the prime beneficiaries of this increased DoD focus area, according to BTIG's Madrid. Northrop has "a strong expertise in the unmanned domain and the aerial unmanned domain," the analyst said, mentioning the Northrop Grumman X-47B and X-47, both demonstration UCAVs that first flew in the early 2000s.
Northrop stands to benefit from the Collaborative Combat Aircraft program if the Air Force considers how a CCA could work with Northrop's B-21 Raider stealth bomber. It's also able to compete for upcoming CCA production contracts. (Defense startup Anduril and drone maker General Atomics were chosen by the the Air Force for initial phases of CCA development, instead of Northrop, Boeing and Lockheed Martin.
) Still, Northrop has strong exposure to unmanned systems through several systems, including its autonomously operated MQ-4C Triton high-altitude long endurance unmanned aerial vehicle (UAV) built for the U.S. Navy and its RQ-4 Global Hawk unmanned aircraft system (UAS) that operates with the U.
S. Air Force. Madrid has a buy rating and $565 price target on the stock, which implies 11.
5% potential upside from Friday's close. That's more bullish than the consensus price target of $520.35 held by analysts polled by FactSet.
Northrop shares have advanced roughly 8% this year and more than 17% just over the past month. While Northrop is a larger, more diversified play on the trend, AeroVironment is an "unmanned pure play" and the largest competitor in the drone market for military applications, particularly among those that are publicly traded, Madrid said. "AeroVironment is kind of the dominant player.
You've seen that with the amount of international orders that they've been getting for switchblades both from Ukraine, France, and a number of other U.S. allies," he said.
Madrid has a buy rating and $245 price target on AeroVironment, which suggests the stock could gain more than 28%. Analysts' average $204 price target, meanwhile, implies about 8% potential upside. Shares have roughly doubled this year.
Kratos , meanwhile, only has roughly 20% of its business tied to unmanned systems, mostly with target drones, with the rest focused on microwave electronics, rocket testing, space training and other markets, Madrid said. He rates the stock neutral — a position that he said could change as Kratos develops a larger program of record in the unmanned domain. The company's CEO confirmed during its Aug.
7 earnings call that Kratos' Apollo drone is under contract and that its Athena drone is expected to be under contract this quarter, which Madrid noted as developments that could bolster his investment thesis on the stock. Kratos has also been operating an unmanned, AI-enabled combat drone, the Valkyrie XQ-58A, since 2019. The company has also expressed interest in competing for upcoming CCA contracts.
General Dynamics is another of Madrid's buy-rated stock in the unmanned systems arena. It's one of the companies that could benefit from heightened unmanned spending given its product portfolio, which includes its small and medium unmanned undersea vehicles, unmanned S-MET ground vehicles for the U.S.
Army, and littoral combat ships for the U.S. Navy.
The DoD awarded multi-million dollar contracts to General Dynamics, Lockheed Martin and Northrop Grumman late last year to sustain aspects of the Navy's littoral combat ship (LCS) fleet. Morgan Stanley's Liwag is similarly bullish on the stock. She had upgraded General Dynamics to overweight from equal weight and lifted her price target by $52 to $345 in an August 9 note, saying the company has a "premier balance sheet and strong prospects for capital return upside.
" Strong demand of its defense products, including ammo and ground vehicles, also indicate earnings growth potential, the analyst added..
