AI-Driven Military Modernization: Unlocking Long-Term Value in Defense Contractors – A Focus on Elbit Systems

The defense sector is undergoing a seismic shift as artificial intelligence (AI) becomes a cornerstone of military modernization. With global defense budgets surging and geopolitical tensions escalating, AI is no longer a futuristic concept but a strategic imperative. According to a report by , the AI in military market is projected to grow from $11 billion in 2024 to $35 billion by 2035, reflecting a compound annual growth rate (CAGR) of 11.1% from 2025 to 2035. This exponential growth is driven by AI's ability to enhance operational efficiency, decision-making, and threat detection across domains like logistics, cybersecurity, and autonomous systems. For investors, this presents a compelling opportunity to capitalize on companies at the forefront of this transformation-none more so than Elbit Systems.

The AI-Driven Defense Sector: A New Era of Growth

The integration of AI into defense is reshaping traditional paradigms. In logistics, AI is optimizing supply chain management, reducing costs, and improving real-time resource allocation. The market for AI in military logistics alone is expected to expand from $2.5 billion in 2024 to $7.5 billion by 2035. Similarly, cybersecurity applications are witnessing rapid adoption, with AI-driven threat detection systems projected to grow from $1.5 billion to $5.0 billion during the same period.

Beyond niche applications, AI is enabling transformative capabilities. For instance, Palantir Technologies has emerged as a key player by providing AI solutions for intelligence analysis and battlefield operations, with its stock surging amid heightened demand. Meanwhile, BigBear.ai is pioneering agentic AI and edge-orchestrated IoT technologies, securing contracts tied to a $150 billion U.S. investment in disruptive defense technologies. These examples underscore a broader trend: AI is not just augmenting existing systems but redefining the very architecture of modern warfare.

Elbit Systems: A Strategic Powerhouse in AI-Driven Defense

Elbit Systems, an Israeli defense contractor, is a prime example of a company leveraging AI to secure long-term value. In 2025, Elbit was awarded a $210 million contract by the Israel Ministry of Defense to upgrade Merkava Main Battle Tanks (MBTs) with AI-enhanced electro-optical sights. These upgrades include advanced target detection, acquisition, and tracking capabilities, both day and night, significantly improving the tanks' survivability and operational effectiveness. The six-year project also involves comprehensive maintenance and electronic system upgrades, reinforcing Elbit's deep partnership with Israel's defense forces.

But Elbit's strategic positioning extends beyond tank modernization. In September 2025, the company launched Frontier, an AI-based wide-area persistent surveillance system. Frontier autonomously detects, classifies, and assesses threats in real-time across land, air, and maritime domains, reducing operational workloads while enhancing mission success rates. This system exemplifies Elbit's commitment to embedding AI into critical defense applications, particularly in border security and threat monitoring.

Expanding AI Capabilities and Strategic Partnerships

Elbit's growth is further fueled by its ability to secure large-scale international contracts. In 2025, the company secured an $8-year, $2.3 billion international defense contract, underscoring its global market presence and long-term revenue visibility. Such contracts are not just financial wins but strategic validations of Elbit's AI-driven solutions.

The company's R&D investments are equally noteworthy. Elbit has migrated to Microsoft's cloud infrastructure to access cutting-edge AI technologies, streamlining adoption across its product lines. Additionally, it is embedding AI into autonomous systems, including drones and missile platforms, where AI-based sensors improve target identification and reduce collateral damage. In cybersecurity, Elbit leverages deep learning for threat detection, while in electronic warfare (EW), AI enhances signal processing and spectrum analysis according to Elbit's blog. These advancements position Elbit as a leader in multi-domain AI integration.

The Road Ahead: AI as a Strategic Multiplier

For investors, Elbit Systems represents a unique confluence of technological innovation and geopolitical demand. As defense budgets continue to prioritize AI, companies that can deliver scalable, mission-critical solutions will outperform. Elbit's track record of securing high-value contracts, its focus on R&D, and its strategic partnerships with governments and tech giants make it a standout in the sector.

Moreover, the company's CEO has emphasized that its investments in AI and advanced systems are designed to enhance competitive advantage and deliver "relevant solutions for customers" according to Morningstar. This aligns with the broader market trend of defense contractors pivoting toward AI-driven capabilities to meet evolving threats.

Conclusion: A Compelling Case for Long-Term Value

The defense sector's AI revolution is not a passing trend but a structural shift. With the global AI in military market set to triple in a decade, companies like Elbit Systems are poised to capture significant value. By combining cutting-edge AI technologies, strategic international partnerships, and a robust R&D pipeline, Elbit is not just adapting to the future of warfare-it is shaping it. For investors seeking exposure to the next phase of defense innovation, Elbit offers a compelling, well-defended (pun intended) opportunity.