It is hard to believe that it is already over halfway through 2025! Technology is moving fast, and so is policy (for a change). From an executive memorandum to a flashy video, it is apparent that the current Administration is a fan of the U.S. Drone Industry. For us investors of U.S. Drone Companies, that is very good news indeed.

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DRONES Index Update

Let’s start with an updated chart of the DRONES Index.

I added Big Bear AI (BBAI) as a minor contributor to the index; otherwise, it remains the same as the last update.

The steep slope between May and July 2025 coincides with the Memorandum and video linked above. In the same timeframe, the U.S. Army released an industry solicitation for high-volume UAS production. All indications are that the Federal government, and Department of Defense, are taking this seriously.

How serious?

Defense Budget

The U.S. Army’s FY26 budget submission includes nearly $850 million for UAS procurement, so they mean business. The Army is budgeting an additional $360 million for UAS Launched Effects (i.e. kamikaze drones launched from a tube) research and development. The aforementioned industry solicitation looks very believable to me.

Still no specific budget line item for Replicator.

There is tremendous market momentum for companies that, historically, have struggled to progress from “start-up” to “profitable”. Several of them are using this opportunity (inflated stock prices) to raise capital via dilution; this is good for the company but generally for prior shareholders.

Let’s take a brief look at some of our holdings.

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KTOS

I wrote a Company Spotlight on Kratos in August 2024. Its reported P/E Ratio at the time was a whopping 303.4. As I write this, the P/E is reported at 452.2! The share price has grown from $21 to $58 in just under one year (275% growth)!

Why the growth in share price? I honestly don’t know. Revenue and earnings have stayed relatively constant year-over-year, and free cash flow is actually worse than it was last year. I can only surmise that the extreme valuation is based on speculation into the growth potential of the Kratos UAS division.

Is this speculation and valuation justified? It is hard to tell. There is about $40 million programmed in for aerial target drones, roughly the same quantity as the previous year. Marine Corps funding for the XQ-58 Valkyrie does not appear on my screener; the Group 5 UAS budget lines appear to be intended to complete the MQ-9A procurements. The Navy has requested $58 million for its Collaborative Combat Aircraft program, but there are enough suitors for this program that I would not wager on the XQ-58.

My opinion is that the KTOS share price has gotten ahead of itself, that the ~300% annualized growth is not backed by fundamentals. I believe that there is a lot of optimism priced into the stock, and that a lack of good news will result in a pullback. I do not believe that its current valuation is sustainable.

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ONDS

Ondas Holdings (ONDS) will probably be subject of my next Company Spotlight. I like the company’s diversification into both the UAS and Counter-UAS products, in multiple markets (military, public safety, industrial). However, the company continues to operate at a loss. The company did, however, announce a public offering of common stock in June 2025, right in the midst of the Federal UAS pandemonium. ONDS also reported a few respectable contracts totaling roughly $18 million. The company’s C-UAS offerings will probably provide its lifeblood for the time being, until wider UAS adoption into the industrial market.

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UMAC

I find Unusual Machines (UMAC) to be a very interesting company, as it is predominantly a components supplier. In fact, it is one of the few suppliers of some key components for NDAA compliance. The company (and its subsidiaries) are demonstrating revenue and I foresee some growth. Stand by for a Company Spotlight article.

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RCAT

Red Cat Holdings (RCAT) pinged many investors’ radars with a U.S. Army contract win in November 2024. Teal Drones CEO and Red Cat CTO (and owner of an impressive moustache) George Matus departed the company one month later. One month after that, Red Cat Holdings became subject of a class action lawsuit for potential misinformation. Shortly thereafter, it completed another equity offering. I hope to cover this company in a Company Spotlight article by the end of the year.

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We can see the DRONES Index value sloping in the right direction, and the U.S. Drone Industry continues to have strong tailwinds. Even if peace breaks out, commercial and industrial drone usage is expected to rise.

As usual, please consult a financial advisor prior to making any investment decisions, and be sure to conduct your own research. The author holds positions in some stocks mentioned here.