Key Points

Geopolitical conflicts are speeding up the demand for inexpensive combat drones.
Analysts project the worldwide drone market will more than double over the coming decade.
The U.S. government is pouring resources into homegrown drone manufacturing, highlighted by a $1 billion initiative to cut dependence on overseas suppliers and ramp up affordable military drones.

The global drone market is climbing to new levels and is expected to more than double from $69 billion to $148 billion by 2036, according to research firm IDTechEx. This rapid expansion stems from geopolitical tensions worldwide that have demonstrated the effectiveness of low-cost drones.

The conflict between Ukraine and Russia has illustrated how drones have shifted from specialized devices to major players. With combat drones priced at just a few thousand dollars, Ukraine has shown these systems can disable multimillion-dollar tanks and armored vehicles.

For investors looking to gain exposure to the expanding drone sector, Red Cat Holdings and Kratos Defense and Security Solutions stand out as two notable drone stocks. Here is why.

The U.S. is pushing hard to grow its drone capabilities

In support of efforts to achieve American drone dominance, the Pentagon has launched a $1.1 billion initiative to produce and deploy thousands of low-cost drone systems priced between $3,000 and $5,000. The aim is to reduce reliance on foreign suppliers and better counter competitors.

The program introduces a fresh method for military technology procurement, moving from a lengthy bureaucratic process to merit-based field evaluations. The objective is to establish a competitive testing environment where commercial makers must demonstrate their drones' combat performance and scalability.

The program includes gauntlets across four phases that test equipment in realistic battle conditions. Drones are given to active-duty pilots and frontline operators, who receive two hours to learn the systems before engaging in live simulated combat.

The initial gauntlet occurred in February and involved 25 companies. Phase two took place at Camp Grayling, Michigan, where 49 firms were evaluated on day and night navigation amid radio-jamming and electronic warfare challenges.

Red Cat advances in the drone dominance challenges

Red Cat's subsidiary, Teal Drones, was selected to proceed to the next phase of the gauntlet tests. With this progress, the company stands as the sole publicly traded pure-play drone stock still active in the challenge.

Next for Red Cat is demonstrating the ability to manufacture and deliver 120 combat-ready kamikaze drones within a strict five-week period ahead of the following gauntlet at Fort Carson, Colorado, in August.

Kratos focuses on advanced AI-powered drones

Kratos Defense also took part in the gauntlet challenges. However, the format favored nimble firms with efficient supply chains for quick delivery of low-cost tactical drones, leading to elimination after phase two.

That said, opportunities remain for Kratos. The company focuses on high-end collaborative combat aircraft. Its XQ-58A Valkyrie is an AI-controlled autonomous aircraft designed to operate alongside manned fighters such as the F-35. These units cost millions each and offer substantial profit margins beyond the reach of smaller drone startups.

In January, the U.S. Marine Corps chose Kratos and partner Northrop Grumman to develop this wingman drone for roles including scouting, absorbing enemy attacks, jamming radar, and striking targets. Priced at $3 million to $4 million, it is far less expensive than an $80 million to $100 million F-35.

These two stocks offer investors access to the growing drone industry

For those seeking exposure to a pure-play drone startup, Red Cat presents an attractive choice. Investors should note the stock carries notable risk, as the company must still complete remaining gauntlet stages while investing heavily to expand manufacturing.

Kratos represents a more established option with involvement in drones and additional defense areas such as infrastructure, software, electronic warfare, and propulsion systems. The firm also faces significant cash outlays for facility growth, yet it holds promising potential through its multibillion-dollar backlog.

With geopolitical tensions elevated and new technologies emerging, warfare continues to change, and the drone market offers an area of swift growth. For aggressive investors aiming to benefit from that long-term expansion, Red Cat and Kratos represent two drone stocks worth considering today.