Drone Stocks Are Down, But Defense Backlogs Tell a Different Story

AeroVironment (AVAV), Red Cat Holdings (RCAT), and Kratos Defense (KTOS) have seen significant stock price declines in 2025, but their balance sheets tell a contrarian story. All three defense contractors are sitting on record backlogs of funded contracts as the Pentagon accelerates its shift toward unmanned systems.

The 2027 defense budget allocates nearly $75 billion specifically for unmanned systems, providing multi-year revenue visibility for drone manufacturers. This spending spike is driven by two forces: the Pentagon's strategic pivot away from manned platforms and Western allies actively de-risking their supply chains from Chinese defense technology.

The disconnect between share price performance and order books creates a potential mismatch. While equity markets have repriced these names lower, the funded contract backlogs represent locked-in future revenue that hasn't yet hit income statements. The unmanned systems allocation represents a structural shift in defense procurement rather than a cyclical bump.