The modern battlefield is increasingly shaped by craft that don’t utilize pilots, uniforms, or dog tags. In Ukraine, drones have become so central that an EU parliamentary briefing describes them as a defining feature of the war, responsible for more casualties than any other weapon system. As you’d expect, the arrival of new tech has led to billions of investment dollars. In fact, the military drone market is on track to reach $23 billion this year and is projected to grow at a rate of ~10% annually from here on.
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Leading the space are three names that offer distinctly different perspectives on the same story. Kratos Defense (KTOS), with its jet-powered XQ-58 Valkyrie and other tactical combat drones. AeroVironment (AVAV) manufactures battlefield workhorses such as the Puma and Switchblade. Finally, Red Cat (RCAT) is a microcap company building NDAA-compliant small drones, such as the Teal 2 and Black Widow, for U.S. and NATO customers.
Other names, such as Australia-based DroneShield and U.S. counter-drone firm Dedrone, are also active in the sector, but their focus is on drone defense—developing systems to detect, disrupt, or neutralize the “offensive” side of the market. With both ends of the industry equally motivated to innovate, the result is a rapidly expanding ecosystem poised to deliver breakthroughs at a pace comparable to consumer tech categories, such as smartphones and laptops.
Kratos Defense (NASDAQ:KTOS)
If you’re trying to visualise the cutting edge of this market, Kratos is the one with the sleek, jet-powered silhouettes. Its XQ-58 Valkyrie was an early “loyal wingman” demonstrator, designed to fly alongside F-35s and F-22s, carrying sensors or weapons at a fraction of the cost of a fighter jet. Kratos is now leveraging that expertise into new designs, such as Apollo and Athena, smaller, modular combat drones specifically targeting European rearmament budgets. A July deal with Airbus to integrate Valkyries for the German Air Force by 2029 effectively gives Kratos a transatlantic distribution partner it could never build on its own.
The latest earnings call gave me that “emerging prime” vibe. In Q3, revenue grew about 26% year-on-year to ~$350 million, with the Unmanned Systems unit up strongly thanks to tactical Valkyrie shipments to an international customer, and net income up more than 170%. Management raised its 2025 revenue guidance and discussed a path to approximately $1.6 billion in sales for 2026 and $1.9 billion in 2027, driven by the Orbit Technologies acquisition, which is expected to enhance satellite communications and data links.
Is KTOS Stock a Buy, Hold, or Sell?
Analyst sentiment is very bullish on Kratos Defense, with the stock carrying a Strong Buy consensus rating, based on 10 Buy and two Hold ratings assigned over the past three months. No analyst rates the stock a Sell. Currently, KTOS’s average stock price target of $102.42 implies ~46% upside potential over the next twelve months.
AeroVironment (NASDAQ:AVAV)
AeroVironment is less sci-fi than Kratos and manufactures what’s known as “loitering munitions” such as its Switchblade series. Its small unmanned aerial systems (UAS), such as Raven, Puma, and Switchblade, are now commonly used in ongoing battle zones like Ukraine and across U.S. and allied deployments worldwide. Fiscal 2025 ended with record Q4 revenue of about $275 million, up 40% year-on-year, and full-year sales of $820.6 million, while bookings hit $1.2 billion and funded backlog nearly doubled to roughly $727 million.
The more recent Q1 FY26 call felt like another victory lap, as revenue jumped to around $455 million, thanks in part to the BlueHalo acquisition, and the backlog increased to $1.1 billion, with roughly $399 million of new bookings in the quarter. AeroVironment maintained its fiscal-26 sales guidance at $1.9–2.0 billion and increased EPS guidance to $3.60–3.70, positioning the business as a long-duration play on U.S. and allied modernization, even as one-off sales to Ukraine decline from nearly 40% of revenue to the mid-single digits.
Is AVAV Stock a Good Buy?
On Wall Street, AeroVironment stock features a Strong Buy consensus rating, based on 13 unanimous Buy ratings. Not a single analyst rates AVAV stock a Hold or a Sell. Moreover, AeroVironment’s average stock price target of $392.33 implies ~38% upside potential over the next 12 months.
Red Cat Holdings (NASDAQ:RCAT)
Red Cat sits at the other end of the spectrum, where the charts are choppy and the conference calls feel more like startup updates. Through its Teal Drones arm, it sells small, U.S.-made, NDAA-compliant sUAS, such as the Teal 2 (marketed as a night-fighting drone with high-resolution thermal sensors) and the newer Black Widow platform. Its strategic angle is to be one of the few “trusted” small-drone suppliers for U.S. and NATO militaries. And indeed, obtaining Black Widow approval for the NATO Support and Procurement Agency catalogue this autumn is a genuine milestone, as it effectively pre-clears the system for continued procurement over the next decade.
The latest earnings call revealed what that looks like in numbers, as well as why the stock is a subject of controversy. Revenue jumped to about $9.6 million, up 646% year-on-year and 200% sequentially, driven mainly by an expanded U.S. Army Short Range Reconnaissance Tranche 2 contract of roughly $35 million and a ramp in Teal deliveries.
However, the company still lost money, reporting an EPS of –$0.16 versus an expected –$0.09 and missing revenue forecasts. With a market cap of nearly $850 million and no earnings, I view RCAT as a call option on U.S. and NATO decisions regarding small-drone procurement. It’s an interesting long-term play, nevertheless.
Is Red Cat Stock a Good Buy?
On Wall Street, Red Cat stock features a Strong Buy consensus rating, based on three unanimous Buy ratings. Similar to AVAV, not a single analyst rates RCAT stock a Hold or a Sell. Further, RCAT’s average stock price target of $15 implies more than 120% upside potential over the next 12 months.
Final Thoughts
The drone industry is rapidly evolving. Companies like Kratos, AeroVironment, and Red Cat are expanding their capabilities in high-end combat systems, battlefield platforms, and agile small drones. I believe that each of these companies presents a unique investment case and is worth further research if you are looking for exposure in the space.