Leonardo DRS Surges 42% Amid Growth Surge—but Analysts Stay Cautious: Here’s Why

Leonardo DRS, Inc. (NASDAQ: DRS) has become a standout performer in the defense technology sector this year, with its stock soaring 42% in May 2025 following strong financial results. The company’s first-quarter earnings beat expectations across the board, fueled by surging demand for its advanced military systems. Yet despite this momentum, analysts have tempered their enthusiasm, downgrading the stock to a “Hold” recommendation. Let’s unpack the forces driving this contradictory market reaction.

The Surge: A Triumph of Execution

Leonardo DRS’s Q1 performance was nothing short of stellar. Revenue hit $799 million, a 16% year-over-year jump and a 9% beat on Wall Street’s estimates. Adjusted EBITDA rose 17% to $82 million, while net earnings surged 72% to $50 million, driven by robust demand for its ground and naval network computing systems, tactical radars, and electric power solutions. The company’s backlog also hit a record $8.6 billion, up 10% year-over-year, signaling strong future revenue potential.

The company’s CEO, Bill Lynn, emphasized that the results reflect “a solid start to the year,” citing investments in autonomous systems and multi-domain capabilities as key growth drivers. The 1.2x book-to-bill ratio suggests customers are placing orders faster than revenue is recognized, a positive sign for future quarters.

Why Analysts Are Pausing at 42% Gains

Despite the upbeat numbers, the “Hold” rating underscores lingering concerns:

1. EBITDA Misses and Margin Pressures
2. While revenue and EPS beat estimates, Leonardo DRS’s full-year EBITDA guidance of $445 million fell $4.4 million short of analyst expectations. Analysts attribute this to rising input costs, particularly in infrared sensing programs, which require specialized materials.

4. Cash Flow Strains Persist

5. Despite a 38% improvement in free cash flow to -$170 million, the figure remains negative. Analysts note that capital expenditures and working capital demands continue to strain liquidity, raising questions about the company’s ability to sustain growth without diluting equity.

6. Scalability Risks in a Heated Market

7. The backlog’s 10% growth outpaces revenue expansion, which could signal operational bottlenecks. With a long-term revenue growth rate of 3.8% (compared to a recent two-year surge of 12.4%), analysts worry about sustaining momentum amid global supply chain challenges.

8. Valuation and External Risks

9. At a $9.83 billion market cap, the stock may be fully priced given the backlog’s 54.4% two-year annualized growth. Additionally, risks like geopolitical tensions, tariffs, and cybersecurity threats—highlighted in the earnings call—could disrupt execution.

Conclusion: A Hold for Now

Leonardo DRS’s stock surge is a testament to its technical prowess and execution in a defense sector primed for innovation. The company’s $8.6 billion backlog and 16% revenue growth are undeniable positives, especially as governments worldwide invest in next-gen military tech. However, the missed EBITDA guidance, persistent negative free cash flow, and scalability concerns temper optimism.

Analysts’ “Hold” recommendation reflects a wait-and-see stance: investors are likely to demand clearer evidence of margin expansion and cash flow stabilization before committing to further gains. With $1.05 in projected 2025 EPS (21% above estimates) and a P/E ratio of 25.3 versus the defense sector average of 22.5, the stock appears fairly valued at best.

In short, Leonardo DRS is a company to watch closely—but not yet to double down on. The path to outperformance hinges on turning its backlog into cash flow efficiently and managing cost pressures in an increasingly inflationary environment. For now, patience is the better part of valor.