The Pentagon’s Drone Push Is Sending Defense Stocks Into Overdrive
The Trump administration is exploring direct ownership stakes in some of America’s top drone startups. The Wall Street Journal reported the Pentagon has already shortlisted companies for funding deals that could include both debt financing and government equity positions.
What the deals could look like
The discussions run through the Office of Strategic Capital, a Pentagon lending office created during the Biden administration to support businesses tied to national security supply chains. That office holds ~$210B in lending authority.
Three firms have been named in the discussions. Performance Drone Works recently secured a US Army contract for reconnaissance drones. Unusual Machines is a drone components supplier. Neros Technologies is a Sequoia Capital-backed startup focused on small first-person-view drone systems.
Unusual Machines counts Donald Trump Jr. as both a shareholder and advisory board member, per the Journal. Neros has raised more than $120M from venture capitalists. Performance Drone Works has raised close to $200M from investors.
The goal of any funding is not to purchase drones outright. The aim is to finance production capacity buildouts and drive manufacturing costs lower, per the Journal.
The production and cost gap
The US can currently produce up to roughly 100K drones annually, according to The Wall Street Journal, far behind Ukraine’s estimated 4M drone output in 2025.
That gap is driving urgency behind the Pentagon’s $1.1B Drone Dominance program, which aims to build a stockpile of roughly 300K low-cost attack drones by the end of 2027.
Cost is a persistent problem. Many US-made drones carry price tags tens of thousands of dollars above the ~$5K per-unit ceiling the Pentagon is targeting under Drone Dominance, according to the Journal. Neros placed second in a recent Drone Dominance competition.
Before Trump's second term, Pentagon purchases accounted for less than 2% of all commercial and government drone system sales in the US annually, per the same Journal report.
How the market reacted
Drone stocks surged broadly following the news, with several companies posting double-digit gains.
Drone and defense stocks rallied sharply, led by Unusual Machines, followed by Red Cat Holdings. Similarly, AeroVironment, Kratos Defense & Security Solutions, Ondas, and AIRO Group also posted strong gains on the news.
Needham & Co. analyst Austin Bohlig called the funding approach a logical fit for Unusual Machines, citing "the critical and supply-constrained nature of drone components and domestic manufacturing capabilities."
Bohlig also noted that a formal funding announcement would deliver a "clear demand signal" for other companies in the sector, per Bloomberg. He flagged that additional drone and defense technology companies are likely engaged in similar discussions, per the same Bloomberg report.
What the budget signals
The Pentagon has requested $75B for drones and counter-drone measures as part of the Trump administration's $1.5T defense budget proposal, per Bloomberg. That figure represents what Bloomberg describes as the largest single year-over-year boost to any defense program in the request.
The department has separately asked for more than $54B for its drone coordination unit, the Defense Autonomous Warfare Group, known as DAWG, according to the Journal. That compares to ~$225M allocated to the unit in the current budget year.
The proposed funding deals would be, as the Journal described them, "the strongest signal yet" from the US military that it is committed to backing drone startups. Negotiations remain ongoing, and the Defense Department has said it will not comment on pre-decisional matters.
