The Iran war proves that America's ability to spend heavily on elaborate weapon systems no longer cuts it. By Al Root
Cheap drones have tilted the battlefield against America's high-cost military.
For decades, the U.S.'s ability to spend the most on the best, most exquisite weapon systems led to American military hegemony. In the air, the F-22 Raptor fighter jet, costing some $150 million, can knock threats to a billion-dollar B2 Stealth Bomber jet out of the sky before the enemy sees either plane, while Patriot missiles, costing $4 million a pop, destroy enemy cruise missiles aimed at U.S. bases or allies.
At sea, the U.S.S. Gerald R. Ford aircraft carrier, costing $13 billion and powered by two nuclear reactors, can launch hundreds of missions a day, while multibillion-dollar nuclear submarines carry cruise missiles 1,000 feet beneath the waves. And on land, M1 Abrams tanks, costing millions, can fire three-foot-long shells at the enemy while rolling 40 miles an hour, protected by multiple layers of armor including ultradense depleted uranium.
But if the wars in Iran and in Ukraine have taught the U.S. anything, it's that all this military firepower doesn't assure battlefield domination. Cheap drones, often costing as little as $10,000, now make it possible to hold superpowers at bay for years or drive them to the negotiating table to end an unpopular war.
In Ukraine, homegrown drones have destroyed thousands of Russian tanks and military vehicles, killed tens of thousands of troops, and turned the Russian invasion into a multiyear stalemate. In Iran, Shahed drones managed to shut the Hormuz Strait -- the world's most important transit point for oil -- by making the risk of crossing too high for tankers. And the U.S. has been unable to destroy all the decentralized manufacturing for the Shahed -- it's like trying to swat 100% of the flies at a summer picnic.
Iran's victory, and it should be considered a victory given the regime's survival , ability to control the strait and world energy prices despite being pummeled by the U.S. and Israeli militaries, shows that the Pentagon needs to adapt -- and adapt fast.
A host of new companies are going to help the U.S. fill the gap, gunning for business that traditional defense companies can't -- or don't want to -- fill. Drone-focused start-ups will compete with old-guard defense companies to provide the weapons of postmodern war, upending what was once a straightforward sector for investors. Companies with the ability to move quickly, adapt and keep costs low should thrive, while those that can't could struggle in the years ahead. Suppliers able to boost output to meet insatiable demand for parts, displacing parts coming from China, will do even better.
"You're looking at a step change in military philosophy," says Bill Birmingham, managing director at Rex Shares, an asset management firm offering the REX Drone exchange-traded fund, which is down about 7% since the ETF launched in late October. The push for American "drone dominance has opened the door to so much innovation."
Just how much that innovation is needed has been on display in Iran. While the U.S. and Israel were able to kill key political and military leaders, knock out conventional defenses, and destroy the Iranian navy, they couldn't prevent Iran from using homegrown drones to terrorize Gulf states and shut the Strait of Hormuz. Iranian drones left America unable to keep oil flowing from the Middle East without a peace deal, imperiling the world economy.
The cost advantage of the new weapons of war is too big to ignore. The U.S. fired hundreds of million-dollar interceptor missiles in days, which will take months to rebuild, leading to fears of depleted stocks, denials of depleted stocks, deals to expand missile production, and the president invoking the Defense Production Act. It is a contributing factor to President Donald Trump's proposed $1.5 trillion fiscal 2027 defense budget, up about 50% from the 2026 defense budget.
In July, Defense Secretary Pete Hegseth unveiled America's plan to achieve dominance by quickly getting drones into the hands of the American soldier. His announcement followed Trump's July executive order calling for American industry to beef up its manufacturing capabilities. The Defense Autonomous Warfare Group, or DAWG, which was created through a Biden-era drone initiative originally called Replicator, is set to see its budget explode from $225 million in fiscal year 2026 to $55 billion in fiscal year 2027.
William Blair analyst Louie DiPalma estimates the U.S. market size for lower-cost drones at nearly $100 billion annually, including those that can still be carried by a soldier. There will be additional spending for more sophisticated drones, including General Atomics' Predator and Reaper, and Boeing's new autonomous Ghost Bat, a collaborative combat aircraft, or CCA, being developed with the Royal Australian Air Force to fly recon or bombing missions with or without manned fighter jets.
Even before the war with Iran started, a group of companies gathered in February at Fort Benning in Georgia to compete in a drone competition, Gauntlet I, designed to put low-cost, one-way attack drones into the hands of American soldiers.
The winner wasn't American. It was Shrike, a first-person-view strike drone that uses a 12-mile fiberoptic tether to prevent jamming and provide the operator with clear imagery. It was built with Ukrainian drone tech and scored a near-perfect 99.3. Ukraine is making millions of drones a year and could make millions more if the parts were available.
Still, "despite four years of unprecedented visibility into Ukrainian battlefield innovations, and the recent war in Iran, Western forces have not institutionalized key lessons into doctrine, force structure, or procurement priorities," says Mick Ryan, senior fellow for military studies at the Lowy Institute, an Australian think tank.
For the U.S., building drone-war dominance must start at home. To jump-start that initiative, the U.S. government banned nonmilitary drones from DJI, a Chinese manufacturer with 70%-plus market share. The ban wasn't to protect America from the security risks of using Chinese technology, but to signal to American industry that the time had come to make, rather than import, the devices that will determine the outcome of conflicts in the coming age.
"We need to be a great manufacturing superpower," says Ethan Thornton, founder of privately held Mach Industries, which uses flexible manufacturing to produce drones and munitions. "The gap between us and China is only increasing."
A host of companies -- new and old -- will be vying to become those manufacturers. Many of them are private. Entrepreneur Palmer Luckey's Anduril is the most valuable privately held defense start-up and aims to be the department store for the U.S. military, building weapons with off-the-shelf commercial technology, including drones.
Shield AI is merging artificial intelligence "hive-mind" tech with low-cost drones. Los Angeles-based Neros Technologies took second place in Gauntlet I with its Archer quadcopter. The U.S. military has deployed Virginia-based Napatree Technology's drone interceptors to hunt other drones.
Investors have more than enough drone stocks to choose from -- at least a dozen -- but the best stocks are likely to be from the drones that have been battle-tested, says Byron Callan, managing director at Capital Alpha Partners. "The Good Housekeeping seal of approval is if [the drones] have actually been used in Ukraine."
Four meet that threshold: AeroVironment, Aevex, Red Cat Holdings, and Swarmer. The latter three are recent start-ups, with the potential to grow into big business, but the risk that comes with companies that are only beginning to boost revenue.
Swarmer, which is connected to Blackwater founder Erik Prince, builds artificial-intelligence-based command-and-control software to link drones, letting one operator command an autonomous swarm. Its tech has been deployed hundreds of thousands of times in missions for Ukraine. Swarmer, which went public in March, has a market capitalization of $500 million and trades at 20 times 2027 revenue of $25 million. Only one analyst, Lucid Capital Markets' Alex Fuhrman, covers Swarmer shares. He rates the stock Buy, and his $60 price target suggests a 33% rise from a recent $45.
Aevex's Phoenix Ghost provides a kamikaze drone capable of loitering for up to six hours in the air while it waits for a target to appear. The company, which has a market value of $2 billion, went public in April, and its shares have traded in a range from roughly $17 to $42.
Part of the issue is the boom/bust cycle of Ukrainian demand. Roughly 50% of Aevex's sales of $606 million will come from Ukraine in 2026, but those sales could dry up in 2027, according to Jefferies analyst Sheila Kahyaoglu, as Ukraine turns from a drone importer to a drone exporter. Despite the loss of Ukrainian business, Aevex's sales are still expected to grow more than 10% between 2026 and 2027. Aevex is the cheapest of the four at roughly 30 times estimated 2027 earnings, and all nine of the analysts who cover the stock rate it a Buy.
Red Cat, which went public in 2021, makes reconnaissance drones, first-person-view attack drones, and drones that work when GPS doesn't. Its maritime division also makes the Variant 7 maritime drone, which was modeled on Ukrainian technology. Red Cat trades at eight times 2027 sales of $218 million, and all the analysts covering the company rate the shares Buy. Clear Street analyst Brian Dobson sees the company benefiting from the DJI ban, and his $19 price target, up from a recent $10.50, is 10 times his 2028 sales target.
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June 26, 2026 21:30 ET (01:30 GMT)
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