3 Defense Stocks with Strong Growth Prospects in 2025: Why AVAV and TDY Are Top Picks

The global defense sector is experiencing a renaissance, fueled by geopolitical tensions, modernization of military systems, and the rise of precision technologies like loitering munitions and advanced instrumentation. Among the companies poised to capitalize on these trends, AeroVironment (AVAV) and Teledyne Technologies (TDY) stand out as leaders in their respective niches. Their recent earnings reports, robust backlogs, and strategic initiatives highlight their ability to dominate high-demand segments. Here's why investors should pay attention.

AeroVironment (AVAV): The Loitering Munitions Leader

Recent Earnings & Backlog Trends
AVAV delivered record-breaking results in its fiscal 2025 fourth quarter, with revenue soaring 40% year-over-year to $275.1 million and a funded backlog jumping 82% to $726.6 million. The surge is driven by its Switchblade drone systems, which captured nearly $250 million in orders across eight countries in 2025. The Switchblade 600 platform, a compact loitering munition capable of precision strikes, now accounts for 80% of Loitering Munitions Systems (LMS) revenue.

Strategic Initiatives
AVAV's acquisition of BlueHalo in May 2025 expanded its portfolio into all domains of modern warfare (air, land, sea, space, and cyber), positioning it as a comprehensive defense solutions provider. Management projects fiscal 2026 revenue to double to $1.9–$2.0 billion, supported by $1.2 billion in 2025 bookings and a shift toward non-U.S. markets (now over 50% of revenue).

Analyst Sentiment & Risks
Analysts have upgraded AVAV to a “Strong Buy” consensus, citing its backlog strength and diversification. However, the stock's 112% surge over three months may have priced in much of this optimism. Risks include execution challenges with the BlueHalo integration and a potential slowdown in Ukraine-related demand (now 12% of revenue in Q4).

Teledyne Technologies (TDY): Advanced Instrumentation Powerhouse

Recent Earnings & Backlog Trends
TDY reported record Q1 2025 sales of $1.45 billion, a 7.4% increase year-over-year, driven by its Aerospace and Defense Electronics segment, which grew 30.6%. The company's backlog hit an all-time high, with orders exceeding sales for six consecutive quarters, fueled by contracts like a $74.2 million U.S. Army sensor upgrade and a $7.8 million Saudi Arabia surveillance system deal.

Strategic Initiatives
TDY's acquisition of Qioptiq (completed in early 2025) expanded its capabilities in optical systems and European markets, critical for advanced instrumentation. The company also advanced Project Artemis, an AI-driven autonomous drone system, and secured a $12 million order for loitering munitions testing. Its Black Hornet 4 nano-drone, deployed in 45 countries, reinforces its leadership in micro-UAVs.

Analyst Sentiment & Risks
Analysts upgraded TDY to “Strong Buy”, with price targets reaching $626 (Stifel Nicolaus) due to its diversified portfolio and strong backlog. Risks include geopolitical headwinds (1% annual revenue drag assumed) and supply chain constraints.

Why These Stocks Are Top Picks in 2025

1. High-Growth Defense Sectors: Both companies are leaders in loitering munitions (AVAV) and advanced instrumentation (TDY), which are critical to modern military systems. The loitering munitions market alone is projected to grow at a 9% CAGR, surpassing $1 billion by 2032.
2. Backlog Strength: AVAV's $726 million funded backlog and TDY's record backlog signal visibility into future revenue, reducing execution risk.
3. Strategic Acquisitions: BlueHalo (AVAV) and Qioptiq (TDY) add complementary technologies, expanding their addressable markets and reducing reliance on any single region or customer.

Investment Advice

• AVAV: Buy for aggressive growth exposure, but monitor valuation risks. The stock's recent rally may require a pullback before entering.
• TDY: A core holding for its diversification and cash flow stability. The stock's $500+ price tag reflects its premium, but its backlog and margins justify the valuation.

Final Take: Defense spending is a recession-resistant priority for governments, and AVAV and TDY are well-positioned to benefit. Their strategic moves, robust backlogs, and analyst upgrades make them top picks for investors seeking exposure to the defense tech boom.

Disclaimer: Past performance does not guarantee future results. Investors should conduct their own due diligence and consider risks like geopolitical shifts and integration challenges.