The DoD Is Spending $50 Billion on Drones. These 3 Stocks Haven't Noticed Yet.
1 Undervalued Large Cap and 2 Microcaps with Upside
The defense drone sector ran hard in 2025. Then it corrected. Then it ran again. Stocks like AVAV 0.00%↑ got dragged along for both rides. Now we’re sitting at an interesting moment. Congress has $50 billion earmarked for one-way attack drones and Counter-UAS systems in the current budget proposal. The DoD is actively ramping procurement. And many names in this space are trading at prices that don’t reflect their fundamentals.
I’m covering three today. My large-cap pick in $AVAV anchors the basket. The two high upside micro-caps complete it. Different market caps, different risk profiles, same macro tailwind.
$AVAV - AeroVironment, Inc.
A Multi-Billion Dollar Business Trading Like It's Broken
$AVAV printed $408 million in Q3 FY2026 revenue. That’s a 143% increase year-over-year, with 38% organic growth on top of the BlueHalo contribution. The funded backlog hit $1.1 billion. Year-to-date total awards crossed $4.6 billion. Cash and investments sat at $649 million at quarter end.
The stock got sold off anyway.
Management lowered full-year guidance after a $151 million goodwill impairment tied to the BADGER SCAR program, which the government terminated for convenience in March. The stock slid roughly 47% off its 52-week high of $417.86. Institutional sellers treated a one-time non-cash charge like a broken business model. That’s the gap we’re looking at.
The SCAR write-down was painful optics. The underlying business is growing at a pace most defense primes would trade for. For the full fiscal year, management is guiding $1.85 to $1.95 billion in revenue with $265 to $285 million in adjusted EBITDA. Non-GAAP EPS guidance lands at $2.75 to $3.10 per diluted share.
The counter-drone opportunity is the forward catalyst. AeroVironment COO Rob Smith, who came over from Lockheed Martin and Raytheon, flagged the Renaissance study at the Wells Fargo conference last week: the Counter-UAS market could reach $17 billion by 2030, and those estimates predate the Iran conflict escalation. The company’s Titan (RF detect-and-defeat), LOCUST (directed-energy laser at under $10 per engagement), and Freedom Eagle-1 (kinetic intercept) give them a layered stack no single-product competitor can match. (One of our favorites on this newsletter ONDS 0.00%↑ covers other C-UAS stack capabilities).
Production capacity tells the story plainly. AeroVironment ramped capacity 300% over the past year. They plan to add another 500% in the next 12 months. The Utah facility alone, built primarily for Switchblade 600 production, holds capacity to support roughly $2 billion in revenue. A $186 million Switchblade 600 Block 2 / Switchblade 300 Block 20 contract came through in Q3. The SCAR termination created a buying window. The DoD confirmed AeroVironment can compete in the recompete. Management is funding continued BADGER development through internal R&D while waiting.
$AVAV now trades well below where the fundamentals put it. A business with $4.6 billion in year-to-date awards, a $1.1 billion funded backlog, $649 million in cash, and a 500% planned production ramp trades at roughly a $10 billion market cap. We are looking at a defense prime that is severely undervalued.
I see this this is a swing trade with a longer tail if the Counter-UAS budget flows through as projected. The entry zone looks attractive below $230. The Q4 earnings report is the next catalyst. Management guided for record Q4 revenue, and the stock has room to recover meaningfully if they deliver.
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