The rise of artificial intelligence is expanding the potential applications for military drones, leading to increased interest and demand for companies in this sector.

We are on the brink of a new defense era characterized by AI-driven military drones that operate autonomously. This shift is attracting significant U.S. government funding, benefiting various companies. The U.S. Department of Defense (DoD) is increasingly focusing on unmanned systems—vehicles that operate remotely or autonomously across air, land, sea, and space using AI or pre-programmed technology. This focus is driven by rising global conflicts, advancements in AI, and security efforts in the Indo-Pacific region, according to BTIG vice president and analyst Andre Madrid.

Madrid notes that the DoD is undergoing a major transformation of its unmanned fleets, with recent conflicts in regions like Nagorno-Karabakh, Ukraine, and the Middle East highlighting the critical role of unmanned systems beyond just aerial applications. The DoD has requested $5.3 billion for unmanned systems in fiscal year 2025, primarily for procurement programs, and BTIG projects a 9.5% annual growth rate in these funding requests through fiscal year 2029. A significant portion of this funding is directed towards the Collaborative Combat Aircraft (CCA) program, part of the Air Force’s Next Generation Air Dominance initiative, which aims to develop AI-enabled, cost-effective unmanned combat aerial vehicles (UCAVs) to support manned fighter jets.

The U.S. Navy currently receives the most funding for unmanned systems, particularly for aerial drones and sea-based vessels. However, the U.S. Air Force is expected to see the highest growth in funding over the next five years, driven by the CCA program, with an anticipated 34% annual growth rate from fiscal year 2024 to 2029. Madrid emphasizes that the DoD is focusing on leveraging unmanned technology and autonomy to enhance mission capabilities, noting that the procurement of software for these systems is a significant new focus for the DoD.

Companies poised to benefit from increased unmanned systems spending include AeroVironment, General Dynamics, Kratos Defense & Security Solutions, Northrop Grumman, and Lockheed Martin. Analysts, including Morgan Stanley’s Kristine Liwag, are optimistic about the defense sector despite previous concerns about supply chain issues, inflation, and potential slowdowns in U.S. defense spending. Liwag suggests that defense stocks may perform well in the current market due to ongoing geopolitical tensions.

Northrop Grumman, a major player in the unmanned domain, stands to benefit from the CCA program, particularly if the Air Force integrates the CCA with Northrop’s B-21 Raider stealth bomber. Northrop’s expertise in unmanned systems includes the MQ-4C Triton and RQ-4 Global Hawk UAVs. Madrid has a buy rating on Northrop Grumman, with a price target of $565, indicating an 11.5% potential upside.

AeroVironment, a leading competitor in the military drone market, has seen significant international orders, particularly for its Switchblade drones. Madrid has a buy rating on AeroVironment, with a price target of $245, suggesting a potential gain of over 28%.

Kratos, which has about 20% of its business in unmanned systems, is developing new drones like the Apollo and Athena, which could strengthen its position in the unmanned domain. Madrid rates Kratos as neutral but notes that this could change as the company expands its unmanned programs.

General Dynamics, another buy-rated stock, could benefit from increased unmanned spending due to its diverse product portfolio, including unmanned undersea vehicles, ground vehicles, and littoral combat ships. Morgan Stanley’s Liwag is also bullish on General Dynamics, citing strong demand for its defense products and potential for earnings growth.