Defense Tech Small-Caps Set to Explode

🛩️ MegaTrend Monday: Defense Tech

Though government cost-cutting is the stated goal of Trump’s administration, one sector is set to benefit from significant spending boosts: defense tech.

In early May, the President released his FY 2026 budget, which included a trillion-dollar defense request (a 13% increase over past spending levels). Key priorities included:

• Develop and deploy missile defense shielding systems (the so-called Golden Dome).

• Expand U.S. shipbuilding capacity, to include shipyard and industrial infrastructure expansion alongside wage increases.

• Modernize air combat, space dominance, and nuclear deterrence platforms.

Small-caps stand to gain most in the new administration’s era, if Elon Musk’s endorsement is any indication - in February he reposted a quote by a Palantir (NASDAQ:PLTR) co-founder, saying that (in reference to DOGE cost-cutting):

In other words, lumbering defense giants with as many bureaucrats between themselves and the tech (think Raytheon [NYSE:RTX], Lockheed [NYSE:LMT], and Boeing [NYSE:BA]) will face stiffer competition from nimbler, product-first DefTech companies.

While Palantir is far from tiny after its meteoric rise, and Anduril is private, plenty of small-cap equivalents are ripe for the picking.

How to Play Defense Tech

❌ The easy move is to direct your investment dollars toward typical, “legacy” defense products (large aircraft, weapons platforms, and the like). This isn’t the best play if you’re looking for hyperscale growth, as small-cap upstarts will struggle in a flooded field with entrenched competition, even if mega-corps like Raytheon face increased scrutiny.

✅ Instead, target nascent growth subsectors like drone tech, niche software tools, and similar forward-thinking defense initiatives.

Marine Infrastructure: Gulf Island Fabrication (NASDAQ:GIFI)

The unique small-cap industrial stock focuses its operational efforts on energy sector marine infrastructure development, with projects including offshore oil and gas platforms. While that’s a bit afield of the core defense thesis, Trump’s stated goal to “[expand] U.S. shipbuilding capacity by investing in America’s shipyards and industrial base” bodes well for the specialty firm’s prospects.

For proof, look to the past. No stranger to government contracting in addition to its core enterprise endeavors, GIFI has worked on NASA contracts in the past to build the space agency’s ocean-bound Mobile Launcher 2 project.

Gulf Island Fabrication operates in a high-cost, low-margin environment, which makes this more of a long-term stable value play (its beta is just 0.26!) than a 10X growth opportunity.

Still, with one of the admin’s directly stated goals falling firmly within its wheelhouse, GIFI is a unique play to capture defense spending expansion alongside secular industrial demand.

Cybersecurity: Arqit Quantum (NASDAQ:ARQQ)

Quantum computing is a whole can of worms in its own right, but Arqit stands out from the vaporware crowd after securing its first Department of Defense contract designed to boost cybersecurity via cryptographic key agreement. This type of niche cybersecurity provides basically unbreakable systems that will come into increasingly greater demand as quantum computing makes even the toughest systems easily cracked.

As you can imagine, nailing a highly secure and secretive project of this scope came with plenty of hurdles, which included compliance with the National Security Agency’s Commercial Solutions for Classified Program demands. As a program of record, the contract now opens the door for greater Arqit opportunities as the company has its proverbial foot in the door.

Arqit’s recent semi-annual report was nothing to write home about - revenue clocked in at just $67,000 and management posted a $17.8 million operating loss - but momentum may be gaining following the DoD win, with plenty of upside ahead.

Drone Tech: Red Cat Holdings (NASDAQ:RCAT)

Priced below $10 per share, Red Cat Holdings is well-positioned to snag the rapidly growing drone defense sector after bagging a series of government contracts, including the U.S. Army Short Range Reconnaissance Contract (SRR). The SRR aims to develop, test, and deploy small-scale drones with a limited learning curve capable of operating cheaply and at the small-unit level (think platoon-sized).

Red Cat’s winning bid will deliver just under 12,000 Black Widow quadcopter systems at about $45,000 each. While the contract represents solid cash flow opportunities, the SRR’s status as a Program of Record also opens the door for Red Cat to access NATO defense sectors to deliver platforms to multinational allies, expanding its total market significantly.

The small-cap drone stock is also partnered with Palantir's Visual Navigation software (VNAV) segment, further increasing RCAT’s industry bonafides.

More DefTech Reads:

This American VC is Betting on European Defense Tech

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It isn’t just American defense sectors set to explode - some expect expanded international spending, too, particularly as Trump’s tariff threats create a sense of unease across Europe. Most of the top international picks are tough for retail to access, but ETFs like the Global X Defense Tech (NYSEARCA:SHLD) offer a decent alternative.

Silicon Valley is Coming for the Pentagon’s $1 Trillion Budget

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This Bloomberg article takes a look at some additional high-tech defense subfields, including mission command software systems, autonomous vehicles, soldier wearables, and drone defense platforms.

Meta Is Recruiting Former Pentagon Officials As It Ramps Up Military Ambitions

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It isn’t just small-caps getting in on defense spending. Meta (NASDAQ:META) is eyeing VR and AI Pentagon projects alongside some other mega-cap peers.