Barclays Is Betting on a Defense Shake-Up. These Stocks Could Come Out Ahead
Defense stocks aren't just about fighter jets and missiles anymore. Software, satellites, and autonomous systems are changing where the industry's biggest opportunities lie, and Wall Street is paying attention. Barclays has launched coverage of the US aerospace and defense sector with six Overweight ratings, betting that the next wave of growth won't necessarily come from the industry's traditional heavyweights.
The new defense playbook
Analyst Anthony Valentini initiated coverage of six companies, including Boeing, SpaceX, RTX, Rocket Lab, Palantir Technologies, and Kratos Defense & Security Solutions.
Barclays believes the US is entering the early stages of a modern industrial revolution. Manufacturing returning to American soil, technological advances, and sustained defense spending are among the forces driving growth.
But the bank isn't treating every defense company equally. It prefers businesses developing software, AI, and autonomous systems over the established contractors that have traditionally dominated government spending.
The reasoning comes down to growth potential. Newer defense technologies offer opportunities beyond conventional weapons programs, while aircraft maintenance and expanding space launch capacity provide additional sources of revenue.
Three targets worth watching
SpaceX and Palantir stand out in Barclays' coverage, with price targets of $254 and $265, respectively. Valentini believes both companies have competitive advantages that could support faster growth and stronger margins than their rivals.
For SpaceX, the appeal extends beyond rockets. Its launch business and Starlink satellite network provide exposure to broadband, defense contracts, and potentially wireless services.
Palantir offers a different opportunity through its AI-powered software, while Rocket Lab gives investors another way to participate in the expanding space industry. Barclays assigned Rocket Lab an $85 target, although its financial results show why that opportunity comes with risks.
Rocket Lab's reality check
Rocket Lab reported $234.07M in quarterly revenue in August, narrowly beating Wall Street's $231.62M estimate. However, its loss of $0.08 per share was wider than the $0.06 analysts expected.
Profitability remains elusive, with a negative net margin of 21.5% and negative return on equity of 6.5%. Analysts expect a full-year loss of $0.20 per share, suggesting the company still has work to do before its growth translates into earnings.
Insider activity also drew attention. Senior vice president Arjun Kampani sold roughly 6K shares in August for approximately $402K, leaving him with about 251K shares.
While insider selling doesn't necessarily signal trouble, the transaction adds another detail for investors evaluating a company that's still working toward profitability.
Where investors should look
Barclays' six picks offer very different ways to approach the sector. Boeing and RTX represent established aerospace and defense businesses, while SpaceX and Rocket Lab are more closely tied to launch activity and space infrastructure.
Palantir and Kratos provide exposure to the software and autonomous technologies Barclays believes could outperform traditional contractors. Recovering air travel and expanding satellite communications also create opportunities across different parts of the industry.
Still, a bullish outlook for defense doesn't guarantee every company will deliver. Barclays sees the biggest opportunities where technology is changing how the industry operates, but Rocket Lab's losses show that strong growth prospects don't always translate into profits.
