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

Drone stocks have sold off in 2026, but AVAV, RCAT, and KTOS still have defense-demand catalysts that could support future growth. The Pentagon’s 2027 budget request includes nearly $75 billion for unmanned systems and counter-drone technology, creating a major tailwind for U.S. drone suppliers. Execution remains the key investor test, with production scaling, supply-chain independence, dilution, margins, and DoD budget timing all worth watching. Drone stocks such as AeroVironment NASDAQ: AVAV , Red Cat Holdings NASDAQ: RCAT , and Kratos Defense & Security Solutions NASDAQ: KTOS are down significantly in 2026, driven by macroeconomic and sector-specific headwinds and company-specific hurdles that mask the mounting potential. While near-term events have weighed on their stock prices, backlogs continue to swell. Record-breaking backlogs and funded contracts are the story in 2026, pointing to revenue and earnings strength in the upcoming quarters. Looking at the industry from a 30,000-foot view, there are two robust tailwinds that will support business going forward. The first is a global shift away from Chinese-backed defense technology. Western powers are unilaterally shifting to domestic supply chains, which positions U.S. companies in prime placement. The second is the Pentagon's shift to unmanned systems. Unmanned systems provide superior performance at a lower cost of life and are central to next-gen warfare. The 2027 defense budget request includes nearly $75 billion for unmanned systems and counter-drone technology, a substantial potential infusion for the industry.