Two future-facing defense plays, great businesses, awkward timing

Defense is one of the few sectors where the future is arriving faster than expected, and it’s arriving on wings. For once, it’s not just about AI. Driven by an array of international conflicts from Ukraine to Gaza, countries are ramping up defense budgets and increasingly counting on unmanned warfare. Drones, autonomy, loitering munitions, uncrewed systems — that’s where modern warfare is heading, whether we like it or not.

In the grand scheme of things, these innovations probably mean fewer direct combat deaths, but also higher unpredictability and scale. In theory, we could have millions of drones fighting each other in the sky, which sounds better on the surface than pure dogfights; however, they can also be scaled far more aggressively than normal fighter jets and therefore potentially do more damage. Which might be bad for the world, but could certainly benefit those two: AeroVironment and Kratos sit right at the center of that shift, and both stocks reflect it after massive rallies this year.

I actually owned both at the start of the year. Unfortunately, when I opened my new portfolio, I had to sell them, locking in something like a ~30% gain. Usually I’d say “not bad,” but I had both down as high-conviction holdings and the timing really hurts in hindsight. I genuinely like both companies and still follow them closely. Admittedly, at the beginning, I was worried that an end to the Ukraine conflict could crush demand, especially for AeroVironment’s products. But I quickly identified that concern as premature. The conflict isn’t ending anytime soon, and even if it did, the genie is out of the bottle. Drone warfare is here to stay.

AeroVironment is the more mature and tangible story. The stock is up roughly 50% this year, though still down about 40% from its October peak near $410. Fundamentals are strong: revenue is expected to more than double this year, followed by ~20% growth after that. Profitability should follow, free cash flow is exploding at high double-digit rates, and there’s no debt. EV/revenue around 5–6 is roughly in line with historical averages, but the business itself is in a completely different phase now. That said, a lot still hinges on sustained geopolitical tension, and profitability remains a question mark. I’m tempted, but not convinced enough to re-enter yet.

Kratos is the more speculative bet. Growth is solid but less explosive: mid-teens top-line growth, high double-digit net income growth projected, and no debt. But this is still very much a “future defense” company rather than a global prime. Execution risk is real, and interference from the big players like Lockheed, Northrop, Boeing, and Airbus is unavoidable at some point. This could happen in the form of a takeover, but also just with the launch of rival products (the most painful scenario for Kratos). The stock is up nearly 200% this year and trades at an EV/revenue of ~10 versus a historical average closer to 3. I was convinced the stock would have a run when I bought it initially, but never expected it to be that explosive so quickly.

I’m honestly annoyed not to own any defense exposure right now. But discipline matters (something I’ve found out the hard way multiple times). Both AeroVironment and Kratos are fascinating, strategically important companies — just not at prices where I feel comfortable pulling the trigger. For now, they stay on the watchlist.

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Is this a generational aviation plot twist nobody saw coming?

Airbus spent the last five years looking like the responsible one among the aircraft manufacturers while Boeing lit itself on fire every other quarter. Go back a year in time and everyone would talk about Airbus as the safe one, the competent one, the “we actually know where our bolts are” one. No mysterious crashes, no doors disintegrating mid-flight, no ridiculous debt load. But 2025 gave us a bit of a plot twist: Airbus is the one stumbling (obviously a slight exaggeration, considering the stock is still up YTD), and Boeing is finally starting to look functional again.

The WSJ reported that Airbus is facing fresh production delays, new supply-chain headaches, and slipping delivery targets. This sounds bad and is exactly what Boeing had to cope with over the last painful years. After an era of flawless execution, suddenly the company can’t deliver planes at the pace airlines desperately need. And airlines are truly desperate right now, which is why the backlogs for Airbus and Boeing are filled for years to come. Demand is exploding and routes are expanding. Is that really the time you should let the market down, Airbus?

Meanwhile Boeing, the company we collectively bullied for half a decade, is now the one cleaning up its act. They won a $100 billion defense contract for the F-47 project over Lockheed Martin and secured the future of this segment for Boeing, while the commercial side is recovering as well. The 737 MAX scandal is fading away, quality-control processes are stabilizing, and delivery numbers are finally heading in the right direction. For once, it’s Airbus giving excuses while Boeing quietly gets things done. A few years ago I would have bet on them going bankrupt rather than beating Airbus.

So do we have a new problem child? Maybe not a full-blown meltdown, but Airbus is undeniably wobbling. Add to that a P/E around 30, which might be fair for now given the demand backdrop, but still too expensive for my taste. Especially considering that sentiment can turn brutally fast in this industry. The moat is undeniably there, and nothing will change about the sort-of duopoly the giant is operating in, but cracks in the story can lead to a re-rating. I loved owning Airbus until earlier this year and made a nice return, but I refuse to pay luxury prices for a company beginning to struggle with years of no serious competition which left its marks.

Airbus will recover like great companies always do. But right now, the premium over Boeing, or one of my other aviation favorites Embraer, seems questionable.

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https://www.airbus.com/en/newsroom/press-releases/2025-10-airbus-reports-nine-month-9m-2025-results

A Tale of Downfall and Rise – From Crash Landing to Cruising Altitude?

Boeing. Yes, the same Boeing that’s been a synonym for chaos, tariffs, and regulatory smackdowns all year. The same Boeing that gets constantly mocked for their safety guidelines and quality demise. The same Boeing that lost out the two-way battle against Airbus a long time ago. Has it though? The stock was left for dead not too long ago, down at frightening low levels around $138. At that point, Boeing’s planes weren’t the only thing hitting ground. But the key difference? The passengers riding the stock didn’t die, they came out stronger and almost twice as rich. If we fast forward a few months the stock is comfortably floating around 55% above those lows, now sitting comfortably above $215. That’s not a typo. And that’s after a recent descend from almost $240.

So what happened? Did Boeing suddenly become a flawless operator overnight? Of course not. On paper, the company is still troubled. But let’s remind ourselves that the thing the market cares most about is noise and buzz. And, believe me, Boeing offers a lot of that.

First, orders. Big sovereign orders always make headlines, like Uzbekistan grabbing 14 Dreamliners with options for more, plus rumors of even bigger deals (Turkey, China). These things move markets because many algorithms don’t care about nuance, they just see “aircraft order” and hit buy. Neither do some retail investors, it seems. Another factor is Airbus’ oversubscription. They can hardly fill orders and their books are full for years ahead. Boeing, on the other hand, has had a few “down years,” not just due to mismanagement but also because of some, let’s call it, reliability issues. The main difference between the two aircraft giants: Airbus doesn’t really lose doors mid-flight. Or randomly discover production defects in fuselages that ground half the fleet. Or deliver jets with engines that need fixing before they even take off.

Second, the FAA actually gave back some trust — restoring parts of Boeing’s certification authority. That’s huge. For years they were basically treated like a drunk driver with their keys confiscated. Now they’re allowed back in the car, at least partially. That speeds up deliveries and reassures investors that maybe, just maybe, Boeing isn’t an eternal basket case.

Third, deliveries are improving. Planes are finally rolling out of factories instead of collecting dust on tarmacs. Deliveries equal cash. Cash equals Wall Street applause. Simple math. As previously mentioned, Boeing’s key issue over the last years was mismanagement. And incompetence leads to problems. These seem to clear off slowly at the moment.

And let’s not forget the setup: the earlier YTD nosedive was tariff-driven, courtesy of Trump’s usual trade-war fireworks with China. That was the panic backdrop that made the bounce look even more violent. When the bar is set at “dumpster fire,” it doesn’t take much to impress. Also, it’s important to mention that Trump is a two-bladed sword: Yes, he caused the tariff selloff, but he also gave Boeing the final push to the sky with the announcement of the F-47 contract going to the troubled manufacturer. Simultaneously, he sent Lockheed right next to Boeing’s previous crash site.

So where does that leave us? Somewhere between reality and hype. Yes, Boeing is legitimately improving. Yes, new orders and regulatory easing are real positives. But let’s not act like all of Boeing’s issues are magically fixed. A 70% move is part fundamentals, part narrative exuberance. Interestingly enough, over-exuberance is a concept very prevalent in today’s market.

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