F-35 Cutbacks Signal a Drone Dominated Defense Landscape: Implications for Investors

The Pentagon's decision to slash its F-35 procurement requests for fiscal year 2026—reducing Air Force orders by 50% and Navy/Marine purchases by double-digit percentages—marks a pivotal moment in defense spending. This move, driven by technical setbacks, fiscal constraints, and a strategic pivot toward emerging technologies like drones, signals a structural shift in how nations prepare for 21st-century warfare. For investors, this is more than a temporary procurement hiccup; it's a clarion call to reassess exposure to legacy defense contractors and reallocate capital toward firms capitalizing on the drone revolution.

The F-35's Structural Challenges: A Perfect Storm

Lockheed Martin's F-35 program, once hailed as the cornerstone of U.S. air dominance, now faces headwinds that threaten its long-term viability. The Pentagon's reduced orders stem from three interlinked issues:

1. Technical Delays and Cost Overruns
   The F-35's Technology Refresh 3 (TR-3) upgrade, critical for enabling full combat capability, has been plagued by software glitches and integration delays. A 2023 halt in deliveries due to TR-3 failures forced Lockheed to warehouse jets until fixes were implemented. Even now, only partial upgrades are complete, leaving aircraft functionally limited until 2026. These delays have compounded cost overruns, with the program's lifecycle expenses projected to hit $2 trillion by 2088—a 279% increase over original estimates.

The stock's stagnation since 2020 mirrors investor skepticism about the program's scalability.

1. Congressional Scrutiny and Fiscal Realism
   Lawmakers are no longer willing to fund a program that devours budgets without delivering on promises. The 2025 National Defense Authorization Act (NDAA) mandates withholding 20 F-35 deliveries until the Pentagon proves fixes for 873 software defects and reliability issues. This “fencing” mechanism underscores a broader trend: defense dollars are increasingly reserved for systems proven to work.

2. Strategic Shift to Drones and AI
   The Pentagon's budget prioritization—shifting funds to hypersonic missiles, Army munitions, and drone swarms—reflects a stark reality: fighter jets are no longer the linchpin of modern warfare. Adversaries like China and Russia are deploying AI-driven drones and electronic warfare systems that can neutralize traditional air superiority platforms. The F-35's $100 million price tag and vulnerability to cyber threats make it an expensive liability in this new paradigm.

Why Drones Are the New Defense Frontier

The shift toward drone warfare isn't merely tactical—it's a cost and capability revolution. Unmanned systems like the MQ-9 Reaper or the Air Force's Skyborg autonomous drone program offer:
- Lower Costs: Drones cost 10–100x less than fighters while performing reconnaissance, strike, and electronic warfare missions.
- Scalability: Fleets of drones can be deployed in “attritable” swarms, absorbing losses without risking pilots.
- AI Integration: Drones can be upgraded with AI in months, not years, adapting to evolving threats faster than legacy jets.

The Pentagon's 2026 budget request allocates $3.2 billion to AI-enabled drone systems, a 40% increase over 2025. This trend is irreversible: by 2030, drones could account for 30% of U.S. combat airpower, according to Pentagon forecasts.

Implications for Investors

Lockheed Martin, which derives 30% of revenue from the F-35, faces a critical inflection point. While the company insists it can stabilize costs through Lots 18/19 contracts, the writing is on the wall: reliance on a single program in decline is a risk.

Investment Strategy:

• Avoid Overexposure to Lockheed Martin: Unless the company pivots decisively toward drone tech or hypersonic systems, its stock remains vulnerable to F-35 headwinds.
• Bet on Drone Leaders: Companies like AeroVironment (AVAV), which dominates small tactical drones, or Kratos (KTOS), developing autonomous combat drones, offer direct exposure to the shift.
• Diversified Defense Plays: Raytheon Technologies (RTX) and Boeing (BA), with portfolios spanning satellites, missiles, and AI systems, are less reliant on any single program.

Key Metrics to Watch:

• F-35 Orders: Track annual procurement numbers; a sustained drop below 100 units/year signals long-term decline.
• Drone Budget Allocations: Growth in funds for programs like the MQ-Next (a $20 billion drone replacement for the MQ-9) will validate this trend.
• Lockheed's Non-F-35 Revenue: If R&D spending on hypersonics, space systems, or AI exceeds F-35-related expenses, it signals a strategic shift.

Conclusion: The Air Force of Tomorrow Isn't Flying Pilots

The F-35's decline isn't just about budget cuts—it's a symptom of a defense industry in transition. Investors ignoring this shift risk being left behind. Capital should flow toward firms innovating in autonomy, AI, and low-cost systems. For Lockheed, survival hinges on proving it can adapt to a world where drones, not fighter jets, define airpower. Until then, the skies belong to the companies building the machines of tomorrow.