F-35 Crossroads: Pentagon Cuts and Supply Chain Risks Threatening Lockheed's Dominance

The Pentagon's fiscal year 2026 budget request marks a pivotal moment for Lockheed Martin's F-35 program. With U.S. Air Force procurement of F-35A fighters slashed by 50%—from 44 to just 24 aircraft—the world's most expensive weapons program faces its sternest test yet. This decision, nested within a broader defense spending pivot toward hypersonic weapons and space systems, raises critical questions about Lockheed's revenue stability, supply chain resilience, and the long-term viability of its F-35-centric strategy.

Strategic Shifts: The Pentagon's New Priorities

The budget reveals a stark realignment of defense spending. Hypersonic weapons, missile defense, and space systems now command disproportionate funding, while legacy platforms like the F-35 are being deprioritized. For Lockheed, this is a double-edged sword: its F-35 backlog remains buoyed by $176 billion in international orders from allies like the UK, Italy, and Australia. However, domestic demand—the program's financial cornerstone—is under existential threat.

The Air Force's cuts are not merely fiscal. They reflect a Pentagon-wide reassessment of operational readiness vs. modernization. Hypersonic missiles, such as the Army's Dark Eagle program, and the B-21 Raider bomber are now front-line priorities. This shift could permanently shrink F-35 production volumes unless Lockheed addresses persistent software delays (Technology Refresh 3, or TR-3) and congressional skepticism.

Supply Chain Risks: A Fragile Ecosystem

The F-35's complex supply chain, spanning over 1,200 suppliers, is uniquely vulnerable to reduced production. Key risks include:

1. Overcapacity and Pricing Pressure: A 50% drop in U.S. orders could force Lockheed to renegotiate contracts with suppliers, squeezing margins.
2. Component Shortages: Delays in TR-3 software fixes—critical to resolving radar and sustainment issues—have already created a backlog of 20 unaccepted jets. Extended delays could strain supplier relationships and prolong cash flow challenges.
3. Geopolitical Headwinds: Sanctions on Russia and China, key suppliers of critical materials like titanium and semiconductors, add uncertainty to global supply chains.

The stock has underperformed the broader market since 2023, reflecting investor anxiety over F-35-related risks.

Investment Implications: Reevaluating Lockheed's Near-Term Prospects

Lockheed's reliance on F-35 revenue—~20% of total sales—makes it disproportionately exposed to Pentagon cuts. While international orders provide a cushion, the company's ability to navigate U.S. budget politics and technical hurdles will determine its fate.

• Near-Term Risks:
• A failed reconciliation bill could slash procurement funding by $51 billion, exacerbating F-35 production cuts.

• TR-3 delays and congressional holdbacks on jet acceptance could prolong cash flow strain.

• Long-Term Outlook:
  The F-35's technological edge and lack of credible alternatives (e.g., no peer to its stealth and sensor fusion capabilities) ensure its global relevance. However, investors should demand clarity on TR-3 fixes and a diversified revenue strategy.

Alternative Investments in the Defense Sector

The Pentagon's pivot offers opportunities elsewhere:

1. Hypersonic Weapon Makers:
2. Raytheon Technologies (RTX): Leverages its ARRW hypersonic missile program and partnerships with the Army's Dark Eagle initiative.

3. Northrop Grumman (NOC): Benefits from B-21 bomber production and advanced sensor systems.

4. Space and Cyber Defense:

5. Boeing (BA): Strength in hypersonic test platforms and National Security Space Launch contracts.

6. L3Harris (LHX): A leader in satellite communications and cyber defense systems.

7. Missile Defense:

8. Raytheon Technologies (RTX): Also dominant in THAAD and Patriot missile defense systems.

RTX's hypersonic division alone grew by 18% in 2024, illustrating the sector's momentum.

Conclusion: A Cautionary Buy for F-35 Bulls

Lockheed Martin remains a titan of defense, but its F-35 program is now a high-risk, high-reward bet. Investors must weigh the program's global longevity against near-term execution risks. For now, a cautious stance—or a pivot to hypersonic/cyber plays—seems prudent. The F-35's future hinges on the Pentagon's ability to balance modernization and affordability, a tightrope act that could redefine Lockheed's trajectory.

Investment Advice:
- Lockheed Martin (LMT): Hold for now, but avoid adding new positions until TR-3 delays are resolved and U.S. orders stabilize.
- Alternatives: Overweight RTX, NOC, and LHX for exposure to the Pentagon's priority areas.

The F-35's crossroads is as much about defense strategy as it is about corporate survival. For investors, the path forward is clear: diversify, or risk being grounded by shifting sands.