Smaller drone stocks lagged the market in 1H. Who managed to buck the trend?

After a strong 2025, the drone stocks took a breather. In the first half of 2026, an equal-weight index of small-cap drone manufacturers compiled by Oninvest rose 15.2%, while the cap-weight version gained just 0.3%. For comparison, the Russell 2000 index added 21.9% in the first six months of the year, while the S&P 500 gained 9.6%.

Note that Oninvest has updated its drone index, expanding it to include 60 stocks, 19 more than before, so as to better cover the entire small-cap space, including micro caps: drone and component manufacturers, software developers, sensor suppliers, and service providers from the U.S., Europe, Israel, and Asia. A chart with the index's performance is below.

The contrast with 2025, when the equal-weight index surged 88.7% and outperformed the benchmarks by a wide margin, reflects a change in fortunes for last year's growth leaders. In the first half, Kratos lost 34.3%, AeroVironment 31.8%, and ZenaTech 53.1%. Demand, however, did not weaken: Kratos’ order book exceeded $2 billion at the end of the first quarter, with a book-to-bill ratio of 1.6, while AeroVironment’s funded order book reached $1.2 billion at the end of its fiscal year, versus $726.6 million a year earlier. In other words, the correction reflected lower valuations rather than weaker operating performance. Tensions in the Middle East flared up again in mid-July, presenting a potential tailwind for companies in the sector.

We selected the equal-weight index’s leading micro caps, along with several of the most interesting companies valued at more than $500 million that delivered strong performance and stand out for the quality of their investment cases.

Aerodrome Group (TASE: ARDM)

One of the leaders was Israeli drone solutions provider Aerodrome Group, which has a market capitalization of around $62 million and gained 359% in the first half. The company handles the entire drone operating cycle, including equipment integration, operator training, mission planning, maintenance, and data processing.

Its solutions are used for intelligence and surveillance, site security, and energy infrastructure monitoring. Aerodrome Group is now strengthening its presence in the defense segment.

By mid-March, the shares had surged 830% from their all-time low. The key catalysts were a strategic investment by EagleNXT that included the right to establish a U.S.-based joint venture, as well as an announced plan for an investor group led by Elad Holdings to take a stake in the company. The group was joined by former Mossad chief Yossi Cohen and Israel Canada real estate company owners Barak Rosen and Assi Touchmair.

For now, the rally reflects expectations of a change in control, an influx of capital, and expanded sales channels more than an improvement in the underlying business. Aerodrome’s revenue fell 32.6% in 2025 to NIS9.74 million ($3.2 million), while the net loss totaled NIS21.61 million ($7.1 million).

Majestic Dragon AeroTech (0918.HK)

Majestic Dragon AeroTech, a newcomer to the index with a market capitalization of around $240 million, has gained 133% year to date. Until August 2024, the company was engaged in the wholesale trade of watches and clothing. Following a rebranding, it began developing a civilian drone business for firefighting, logistics, and agriculture.

The traditional wholesale business still generates around 65% of revenue, but the mix is gradually changing: in fiscal 2026, revenue from the UAV business rose 27%, while wholesale revenue fell 26%. Judging by the stock’s performance, the market is already pricing in the company’s future transformation, although it is only gradually becoming visible in the financial results.

Park Aerospace (PKE)

Park Aerospace delivered the strongest performance among companies with market capitalizations above $500 million, with its shares rising 80.7% in the first half. The company produces composite materials for the nacelles of LEAP-1A engines used by the Airbus A320neo family and remains the only qualified supplier of ablative materials for PAC-3 Patriot missiles. In the drone segment, it supplies composites for Kratos’ XQ-58 Valkyrie, according to a Citizens JMP note. It also participates in programs for Israel’s Arrow missile defense system.

In fiscal 2026, revenue rose 18.2% to $73.3 million, while adjusted EBITDA increased 35.3% to $15.8 million. Another potential driver is the sharp increase in production of PAC-3 MSE missiles: the U.S. fiscal-2027 budget request calls for procurement to increase more than 14-fold versus 2025, while Lockheed Martin plans to expand interceptor production. To meet this demand, Park Aerospace is building a new plant that will more than double its composite-material production capacity. The main risk is high sales concentration: around 40% of Park Aerospace's revenue is tied to GE Aerospace programs for a single client.

Citizens JMP initiated coverage on June 9 with a “market outperform” rating at a target price of $42 per share, estimating the company’s total addressable market at $2.18 billion for 2026-2030. According to MarketWatch data, the stock has two ratings, both “buy.” The target price of $42.50 per share implies 23.9% upside versus Thursday’s closing price.

Parrot (PARRO)

Shares of French microdrone manufacturer Parrot rose 32.7% in the first half of 2026 and 40.6% year to date. In the first quarter of 2026, the company’s revenue increased 52% year over year to EUR27.9 million, while sales of professional micro-UAVs doubled to EUR21.3 million, driven by deliveries of its ANAFI UKR reconnaissance drone.

Another catalyst was the drone’s inclusion in a European armored vehicle program: the client has already received 250 systems, with another 175 due to be delivered under a long-term agreement. Cantor Fitzgerald estimates that those 175 systems alone will generate around EUR2.6 million in second-quarter revenue. The company is expected to report on July 31. The main risk is its dependence on government tender schedules and component delivery timelines.

Parrot has only one rating, from Cantor Fitzgerald. On May 21, the firm’s analyst reiterated their “overweight” rating while raising their target price from EUR11 to EUR12 per share, 14.3% above Thursday’s closing price. 

Palladyne AI (PDYN)

Shares of Palladyne AI, a developer of software for autonomous drones and drone swarms, rose 42.7% in the first half of 2026. Its preliminary second-quarter results exceeded expectations: revenue increased around 480% year over year to $5.8 million, while the order book grew to $24 million from $17.3 million a quarter earlier.

Another catalyst was its strategic partnership with Israel Aerospace Industries. Under the agreement, Palladyne received exclusive U.S. rights to manufacture and market loitering munition systems. In notes dated July 8 and June 30, respectively, analysts at Lake Street and A.G.P. maintained their “buy” ratings at respective target prices of $11 and $12 per share. The main risk is the company’s high cash burn: with quarterly spending of $8-9 million and $44 million in cash at the end of June, the company has enough funding for around five or six quarters without raising additional capital.

According to MarketWatch data, Palladyne has three “buy” ratings versus one “hold.” The average target price of $11.25 per share is more than double Thursday’s closing price.

Red Cat (RCAT)

Red Cat had gained 34.3% year to date by the end of June, but by mid-July, the shares had surrendered all those gains and moved into negative territory for the year, down 2.5%. The decline followed a $225 million additional share offering priced at a discount to the market, after which the stock lost around 14% in a single session, followed by a hit from a broader selloff in risk assets amid renewed U.S.-Iran tensions.

The investment thesis, however, remains unchanged. In May, the company began full-rate production of the Variant 7 uncrewed surface vessel, designed for reconnaissance, coastal security, and strike missions. In the aerial segment, its Teal drones advanced to the final stage of the Pentagon’s Drone Dominance Gauntlet II competition, whose winners will have a chance to secure production contracts in August. On July 2, Northland reiterated its “outperform” rating at a target price of $22 per share.

According to MarketWatch data, all eight analysts covering Red Cat rate the stock a "buy." The target price of $21.60 per share implies 168% upside versus Thursday’s closing price.

The renewed escalation between the U.S. and Iran is increasing interest in several defense segments: reconnaissance microdrones, autonomous maritime platforms, and missile defense systems. The most obvious beneficiary in our selection is Park Aerospace, as increased use of PAC-3 Patriot missiles requires greater production of key components. For Palladyne AI, the localization of U.S. production of IAI loitering munitions remains a potential driver. For Aerodrome Group, the catalysts are new investments and a potential U.S.-based joint venture, while Parrot could benefit from accelerated procurement of reconnaissance microdrones by European countries. Red Cat’s investment thesis remains tied to the start of full-rate production of the Variant 7 and its participation in the Pentagon program. The recent combat use by the U.S. of uncrewed surface vessels merely confirms demand for this weapon but does not necessarily mean that Red Cat itself will receive orders.

Important to note is that geopolitics alone does not guarantee revenue growth. The first half showed that the market is responding less to headlines and more to actual contracts, eligibility for government procurement, and companies’ ability to scale production. Those factors will ultimately determine the sector’s performance.

This text is for informational purposes only and does not constitute personalized investment advice.