Three U.S. and European drone stocks that could ride recent momentum in sector

In recent years, the U.S. government has stepped up support for the drone industry. Under the Trump administration, Pentagon budgets for unmanned systems have been repeatedly increased, dedicated programs launched, and export restrictions eased. In 2020, during Trump’s first term, Washington revised the Missile Technology Control Regime (MTCR) to allow more flexible exports of large armed drones to allied countries. This year, Trump has signed new executive orders aimed at accelerating testing, boosting domestic production, and promoting U.S. drone exports.

The U.S. remains the largest drone market, with industry revenues estimated at $11.4 billion in 2024 and projected to reach $31.1 billion by 2034, according to market.us. That implies a CAGR of 10.5% over the period. By comparison, Europe’s drone market was valued at just $4.5 billion in 2024 but is forecast to expand to $32.3 billion by 2033, Market Data Forecast estimates. This represents a CAGR of 24.5%, driven largely by subsidies and efforts to replace Chinese-made drones.

In the draft federal budget for fiscal 2026, which begins October 1, 2025, the U.S. Department of Defense for the first time listed the “autonomy and autonomous systems” line as its own section, allocating $13.4 billion, with a particular focus on counter-drone technologies. Of that, $9.4 billion is dedicated solely to the procurement of unmanned and remotely-operated aerial vehicles, marking a shift toward serial production and widening the pipeline of contracts for drone sensor, software, and platform suppliers.

In Europe, the European Defense Fund is providing comparable support. In May 2025, the European Commission committed EUR910 million to 62 projects spanning drones to counter-unmanned aerial systems, a move expected to bolster the competitiveness of local manufacturers.

Against this backdrop, analyst Aldiyar Anuarbekov has identified three small/mid-cap companies in the U.S. and Europe and evaluated their investment case.

Kratos Defense, a pioneer in next-generation combat drones, has seen its market capitalization climb to about $11.7 billion, with its share price up roughly 162% year to date amid heightened interest in “loyal wingman” systems – drones designed to operate alongside manned aircraft.

The company, long known for producing jet-powered target drones used in U.S. Navy training exercises, is now seeing growth driven by its strike UAV programs, particularly the experimental XQ-58A Valkyrie and its predecessor, the UTAP-22 Mako. In 2023, the U.S. Marine Corps (USMC) began testing the first Valkyrie units and has since moved the platform into a formal procurement program, signaling a shift to full-scale production, Aviation Week reported. BTIG estimates potential USMC orders at about 30 drones annually, which, at a projected $7.5 million per unit, could generate roughly $225 million in additional yearly revenue.

After a soft first quarter, Kratos posted stronger results in the second: revenue rose 17% year over year to $351.5 million, while adjusted earnings per share came in at $0.11 versus $0.14 a year earlier. The company raised its 2025 guidance, now projecting revenue of $1.29-1.31 billion and adjusted EBITDA of $114-120 million, up from $1.27 billion and $112-118 million, respectively. Its orders at quarter-end stood at $1.4 billion, roughly equal to a full year of revenue at current levels. The last-12-month book-to-bill ratio of 1.2, indicating orders exceeded deliveries by 20%.

In the second quarter, adjusted EBITDA declined 5% year over year to $28.3 million, with margins narrowing to 8.1% from roughly 10.0% a year earlier. The management attributed the pressure on profitability to contracts signed before the inflation surge in 2020-2021, where rising production costs outpaced initial estimates.

Looking ahead, Kratos sees opportunities to improve margins through economies of scale, the rollout of new, higher-margin programs, and a shift toward more profitable contracts. The company has the potential to evolve from a niche player into a major drone maker. Still, extended government procurement cycles and stiff competition from large defense contractors could slow that down and cap profitability.

What's the word on Wall Street?

Over the last 12 months, Kratos shares have traded at a P/E ratio of 434, reflecting the company’s minimal current earnings. Effectively, investors are paying up in anticipation of future success in its next-generation programs.

BTIG reiterated its "neutral" rating on the stock on June 6, citing Kratos’ diversified portfolio spanning satellite communications to jet engines, while noting that its strong position in the drone segment positions it to benefit from structural changes in defense aviation. However, BTIG cautioned that the investment case remains speculative.

According to MarketWatch, 14 of 17 coverage analysts rate Kratos as a "buy" or "overweight," with the remainder recommending "hold."

AeroVironment, a U.S. manufacturer of small drones and loitering munitions, has evolved from supplying portable UAVs that were once standard kit for U.S. Army infantry companies, to become a major global defense player. The company has been one of the chief beneficiaries of Western military aid to Ukraine. Since the start of 2025, its shares have risen nearly 63%, for a market capitalization of about $12.5 billion today.

Its flagship products include the Switchblade series of kamikaze drones and small reconnaissance UAVs such as the RQ-20 Puma AE, Raven, and Wasp. In 2022, the U.S. sent at least 700 Switchblade 300s to Ukraine. The heavier Switchblade 600, capable of destroying armored targets, has been in use by the Ukrainian army since 2023. In August 2024, AeroVironment became a key contractor for the U.S. Army’s $1 billion Low Altitude Stalking and Strike Ordnance (LASSO) program.

Fiscal 2025, which ended April 30, was a record year. Annual revenue rose 14% to $821 million, while fourth-quarter revenue jumped 40% . The surge was driven by a boom in Switchblade sales, which climbed 87%. EBITDA surged 178% to $61.6 million (22.4% margin), and EPS increased to $1.61 from $0.44 a year earlier. The order book reached $1.5 billion, with $727 million from funded contracts, up 82% year over year, the rest consisting largely of long-term Switchblade orders from the U.S. government.

In May 2025, AeroVironment acquired BlueHalo, a private company specializing in space communications, laser-based counter-drone technology, and electronic warfare systems. The deal lifted the fiscal 2026 guidance to revenue of $1.9 billion-2.0 billion and EBITDA of $300 million-320 million (with a margin of about 16%). At the time of the acquisition, BlueHalo’s order book stood at $2.5 billion.

What's the word on Wall Street?

Analysts at William Blair assigned AeroVironment an "outperform" rating in July, highlighting the company’s strengthened leadership in the loitering munitions market. Jefferies also rates the stock a "buy," citing a record first quarter and growth drivers that exceed prior expectations. Among the three companies profiled, AeroVironment stands out as the most balanced: profitable, with differentiated products and steady government demand. According to MarketWatch, the stock is covered by 12 analysts, all of whom recommend it as a "buy."

France’s Parrot SA is a “dark horse” in the drone sector. Once known for consumer quadcopters, the company has pivoted toward professional drones for law enforcement and commercial clients in response to mounting competition from Chinese manufacturers. Parrot shares have surged nearly 190% since the start of 2025, with the company's market capitalization now at roughly EUR250 million.

The company is now a niche supplier of intelligence and security drones, positioning itself as an alternative to Chinese platforms. Its flagship product, the Anafi USA compact quadcopter, is built to U.S. military and intelligence specifications and assembled in the U.S. It is listed in the Pentagon’s Blue UAS program as approved for military and government use. Parrot thus fills the gap created by restrictions on drones made by China's DJI and has become a sought-after replacement for U.S. security agencies.

Parrot is still recovering from years of losses. Revenue grew 20% year over year to EUR78 million in 2024 and rose another 10% year over year to EUR33.6 million in the first half of 2025. The company remains unprofitable, largely due to the costs of launching new products, such as the Anafi UKR and Chuck 3.0 AI autopilot, and higher working capital requirements. Still, growth prospects are improving: sales of professional microdrones have increased about 20% year over year, and the commercialization of new models in the second half of the year is expected to lift revenues.

Key growth drivers include the Anafi UKR and Chuck 3.0, as well as its Pix4D photogrammetry software, particularly in the U.S., UK, and Japan. Parrot is positioned to benefit from EU and NATO initiatives to replace Chinese drones: it participates in the Blue UAS program, has access to Western markets and government contracts, and joins European defense projects in which cybersecurity and technological sovereignty are priorities.

What's the word on Wall Street?

Parrot’s 2025 rally has been driven more by expectations than by sustainable financial performance. The company remains loss-making, rendering valuation metrics such as P/E and EV/EBITDA inapplicable. Even so, Parrot stands out as one of the few European players in the drone market, offering upside through a possible takeover, increased government support, or participation in efforts to build a “European DJI.”

The stock is a high-risk, high-reward proposition: volatile, but potentially attractive to investors who see long-term opportunity in the push for drone import substitution in Western countries. At present, MarketWatch data shows the company is covered by only one analyst, who rates the stock a "hold."

The AI translation of this story was reviewed by a human editor.