The defense sector is undergoing a significant structural evolution. Global conflicts have fundamentally altered defense strategy by proving that low-cost, mass-produced drones can challenge the most advanced militaries in the world. Defending against AI-powered drone fleets is challenging and exorbitantly costly, which creates major cost asymmetries. In response, defense systems are beginning to incorporate directed energy weapons that function without the need for projectiles.
As unmanned aerial vehicles (UAVs) and counter-UAV systems mature from experimental prototypes to deployable, field-ready assets, it creates opportunities and risks up and down the supply chain. Legacy defense contractors have been slow to adapt, while a new crop of agile, tech-first upstarts is challenging the status quo. Insights and research workflows available in the AlphaSense platform help us gauge these opportunities and risks, offering a glimpse into the high-tech future of defense.
UAVs Achieve Lift-Off and Reshape Warfare Economics
Low-cost, mass-produced drones have proven that they can challenge even the world's most capable militaries. Ongoing conflicts in Ukraine and the Middle East have been a proving ground for autonomous defense systems. Fifth-generation fighter jets like the F-35 use tactical drones for everything from missile interception to radar jamming. AI-powered drone swarms can execute complex, multi-layered strikes in combat zones without putting human pilots in danger. Tens of thousands of feet below, subsea drones are monitoring sensitive data cables and energy pipelines.
Unfavorable Economics Prompt a Strategic Pivot
The spread of inexpensive drones in combat applications has created a massive cost imbalance that makes conventional defense models unsustainable. Using a $3.7 million Patriot interceptor missile to down a $35,000 drone is unfeasible. This cost asymmetry has spurred a shift toward an “attritable” defense model — one that favors large numbers of low-cost, expendable assets over a small number of expensive, highly specialized ones.
As more sovereign defense systems have adopted attritable models, demand for directed energy weapons and cost-effective interceptor drones has skyrocketed. Raytheon won a $5 billion contract to supply its Coyote drones to the U.S. Army’s integrated air defense system. In directed energy, current development efforts are focused on scaling laser systems to the megawatt class, a critical threshold for effectively neutralizing advanced, high-velocity threats such as ballistic and hypersonic missiles. One AlphaSense expert called directed energy the “closest thing to a Star Trek type force field that exists” today.
These new technologies are exponentially more cost effective than traditional weapons systems. High-energy laser systems like Israel's Iron Beam can intercept aerial attacks for roughly $2 per engagement, while high-power microwave technology essentially offers an infinite magazine with near-zero cost per shot. The days of “just launching cheap rockets and allowing their air defense to spend all of their expensive bullets” appear numbered. Yet directed energy systems can be challenging to operate, a potential adoption headwind.
[Directed energy] fries the electronics and each shot is pennies. Right now, the U.S. uses Patriot missiles to shoot down these Russian and Iranian drones. The Patriot missiles are $2 million to $4 million.
The directed energy as the drone's flying in, you [have] got to keep your laser pointed on that drone and stay on that drone for five to 10 seconds, for that drone to heat up and to burn with a laser. That's hard to do because drones are twitchy and they're moving and they're a long way away usually.
Regulatory Drivers Accelerate
The American Drone Security Act of 2022 went into full effect in late 2025 when the grace period for compliance expired. This marked the start of a complete ban on the federal procurement of Chinese-made drones, driving further decoupling of supply chains already under strain. Additionally, new FCC restrictions now ban the use of foreign-produced critical components such as motors, batteries, and flight control systems.
Industry experts believe reshoring these critical supply chains will be a challenge. While some see immediate opportunities to replace Chinese technology in areas like advanced sensors, secure datalinks, and AI computing hardware, elements such as specialized motors and high-capacity batteries will take significantly longer to domesticate. Moreover, vulnerabilities at the Tier 2 and Tier 3 supplier levels are a headwind to the industry's ability to scale production. While 95% of supply chain leaders have visibility into Tier 1 risks, only 42% say the same about Tier 2 and beyond, according to McKinsey.
Where are the big bottlenecks? Everything that is in [the] drone industry, everything that is battery-related. There is nothing on the market that will fly without Chinese batteries. If someone says that there is, then they're just lying.
Legacy Defense Contractors vs. Software-First Neo-Primes
Heavy capital requirements, strict contracting regulations, and the military's historical preference for established vendors have traditionally created a high barrier to entry in this space. However, the rise of asymmetric warfare and the Pentagon's newfound embrace of non-traditional suppliers have opened the door for tech-focused disruptors, broker research in AlphaSense reveals.
Defense primes like Lockheed Martin and Raytheon have historically relied on a cost-plus contract structure that experts say disincentivizes rapid, agile software development. These firms have been slow to shift away from this structure for fear of cost overruns. But now, well-capitalized “neo-primes” such as Anduril Industries, Shield AI, and Skydio are building vertically integrated, AI-driven systems at commercial speeds. These upstarts use business models that support rapid iteration and software optimization over hardware endurance.
The Department of Defense's focus is explicitly pivoting toward speed to capability, which analysts say inherently favors companies that can rapidly scale low-cost autonomous solutions. This has opened the door for major wins like Anduril's recent $20 billion, 10-year Army contract for AI-enabled battlefield technologies. Broker research in AlphaSense reveals optimism about these software-first disruptors, with analysts contending that their shares may have more upside than supply- and cost-constrained legacy primes.
[Anduril’s] entire approach is different than a Boeing and Northrop where they are making significant margin off of engineering design of their hardware and delivery and refurbishing overhaul-type approach.
Future Outlook for Defense
Global defense budgets are shifting to incorporate and defend against these new, AI-powered unmanned systems. The Trump administration’s fiscal year 2027 defense budget proposal contains a record $70 billion in outlays on drones and counter-UAV systems. Meanwhile, the U.S. Air Force is requesting nearly $1 billion in 2027 for collaborative combat aircraft procurement.
Could this wave of investment trigger a parallel wave of consolidation? One executive at a legacy defense prime says that M&A may not be advantageous for the disruptors.
Anduril is winning because of their speed, and partnering with a prime just inherently decreases that. I don't think it'd be their first choice... . [I]f we keep heading in this direction of where we are right now in a commercial-driven business model that's heavily focused on software AI, what is the role of the legacy primes? Are they just going to be manufacturing hubs for some of these start-ups?
Going forward, experts see drones and unmanned aerial systems as an integral part of a comprehensive sovereign defense strategy. The defense prime executive continued that major militaries will likely adopt a “two-tiered structure,” with conventional equipment on one tier and high-volume, low-cost drones on the other.
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