Leonardo DRS: A Strategic Powerhouse in Defense Modernization

In an era where global security threats are evolving at an unprecedented pace, the U.S. defense sector has become a cornerstone of both national resilience and long-term economic opportunity. Among the companies poised to benefit from this shift is Leonardo DRS (NASDAQ:DRS), a mid-tier defense contractor that has carved out a unique niche in the modernization of naval, cyber, and autonomous systems. While the company faces near-term cost pressures—particularly in raw material sourcing and R&D expenses—its strategic alignment with high-priority defense initiatives and its ability to deliver mission-critical technologies make it a compelling long-term growth play.

Strategic Positioning in U.S. Defense Modernization

Leonardo DRS has positioned itself at the intersection of three transformative defense trends: electric propulsion and power systems, advanced infrared and AI-driven sensing, and secure network computing. These capabilities are not merely incremental upgrades but foundational to the U.S. Navy's vision of a “network-centric force” capable of operating in contested environments.

The company's dominance in naval modernization is underscored by its critical role in the Columbia Class submarine program, a $150 billion initiative to replace the U.S. Navy's aging ballistic missile submarine fleet. Leonardo DRS's electric propulsion systems and combat management hardware are integral to this program, which is expected to generate multi-decade cash flows. The company's Q2 2025 earnings report highlighted a 41% year-over-year increase in adjusted EBITDA for its Integrated Mission Systems (IMS) segment, driven largely by these programs.

Beyond submarines, Leonardo DRS is advancing naval network computing and shipboard cybersecurity through its Integrated Voice Communication Systems (IVCS), now deployed on over 100 U.S. and allied destroyers and frigates. These systems are designed to withstand cyberattacks while enabling real-time tactical decision-making—a critical capability as adversaries increasingly weaponize digital infrastructure. The global defense cybersecurity market, valued at $19.14 billion in 2024, is projected to grow at a 16.1% CAGR through 2032, a trend Leonardo DRS is well-positioned to capitalize on.

Innovation and R&D: A Tailwind for Future Growth

Leonardo DRS's commitment to innovation is evident in its rising internal R&D investment, which climbed to 3% of revenue in mid-2025 from 2.8% in 2024. This spending is concentrated on counter-unmanned aerial systems (UAS), space-based missile tracking, and next-generation infrared sensors—areas where the company is developing “ReadyNow” solutions that can be rapidly deployed to address emerging threats.

One standout example is the company's next-generation A.I. Processor (AIP), which enhances situational awareness and threat detection for warfighters. This technology aligns with the U.S. Department of Defense's push for AI-enabled warfare, a domain projected to grow into a $20 billion market by 2030. Similarly, Leonardo DRS's quantum cascade laser technology for directed infrared countermeasures (DIRCM) is being integrated into military helicopters to neutralize heat-seeking missiles—a capability with strong demand from NATO allies.

The company's R&D efforts are further amplified by strategic partnerships with shipbuilders like Huntington Ingalls Industries (HII) and its subsidiary Newport News Shipbuilding. These collaborations, such as the $45 million U.S. Navy Submarine Industrial Base (SIB) investment, ensure Leonardo DRS remains a key player in the industrial backbone of U.S. naval power.

Navigating Near-Term Challenges

Despite its strong positioning, Leonardo DRS faces near-term headwinds, including rising costs for materials like germanium, a critical component for infrared sensors. The company has also incurred margin pressures in its Advanced Sensing and Computing (ASC) segment due to higher R&D spending and program execution challenges. However, management has outlined a clear path to mitigation:

1. Supply Chain Resilience: The company is diversifying its supply chain for critical materials, with relief expected by 2026 as domestic production of germanium and other components ramps up.
2. Margin Expansion: The Integrated Mission Systems segment's 290-basis-point margin expansion in Q2 2025 demonstrates the company's ability to leverage its high-margin submarine and propulsion programs to offset near-term pain in other areas.
3. Backlog Strength: With a $8.6 billion backlog as of Q2 2025—9% higher than the prior year—Leonardo DRS has visibility into sustained revenue streams, particularly from the Columbia Class program and international contracts.

The Bigger Picture: Defense Spending and Global Trends

Leonardo DRS's growth is underpinned by macro-level tailwinds. The One Big Beautiful Bill Act, enacted in early 2025, allocated $150 billion in new U.S. defense funding, with $113 billion front-loaded into FY2026. This includes $13.5 billion for digital modernization, a direct boon for the company's cybersecurity and AI initiatives. Meanwhile, the FY2026 U.S. defense budget request of $962 billion—a 12% increase from FY2025—signals continued prioritization of technological overmatch.

Globally, the Russia-Ukraine war has accelerated NATO's defense spending goals, with members now targeting 5% of GDP for national security (3.5% for defense). Leonardo DRS's products, already deployed in allied navies like Australia's and Japan's, are well-positioned to benefit from this shift.

Investment Thesis

For investors, Leonardo DRS represents a rare combination of strategic relevance, financial discipline, and long-term visibility. While near-term costs and supply chain issues are valid concerns, these are largely temporary and do not detract from the company's core strengths. The Columbia Class program alone ensures a stable revenue base through the 2040s, and the company's R&D-driven innovation pipeline positions it to lead in high-growth areas like AI and cyber defense.

Conclusion: Leonardo DRS is a defensive growth stock with a clear line of sight to the future of U.S. and allied defense. Investors with a long-term horizon should consider its robust backlog, rising R&D returns, and alignment with multi-decade modernization programs as compelling reasons to overweight the stock, despite near-term noise. In a world where security is increasingly defined by technological edge, Leonardo DRS is not just a participant—it's a leader.