Rheinmetall: The European Defense Play to Watch as NATO Spending Surges

The NATO summit of 2024 marked a turning point for European defense spending, with allies committing to a new paradigm of military investment. For German defense giant Rheinmetall, this shift has become a windfall. The company's Q1 2025 sales surged 46% year-over-year to €2.3 billion, fueled by a €62.6 billion order backlog and strategic bets on missile production, satellites, and infrastructure. Now, with UBS upgrading its price target to €2,200, investors are asking: Is Rheinmetall positioned to dominate Europe's defense renaissance? The answer, for now, is a resounding yes.

The NATO Effect: Structural Growth in Defense Spending

The 2024 NATO summit put pressure on European allies to boost defense budgets, with proposals to raise spending to 5% of GDP by 2030. While not all countries have fully embraced this target, the geopolitical reality of Russia's war in Ukraine has forced a reckoning. Germany, Rheinmetall's largest market, has pledged to modernize its military, while Poland, the Baltics, and others are expanding arsenals.

UBS analysts estimate that NATO members could collectively allocate €400 billion annually to defense by 2030, a 40% increase from current levels. This is Rheinmetall's sweet spot: 50% of its revenue already comes from outside Germany, with strong ties to European allies like Spain, Finland, and the UK. The company's dominance in land systems (e.g., armored vehicles) and its pivot to high-demand areas like air defense and ammunition production align perfectly with NATO's priorities.

Rheinmetall's Playbook: Scaling for Scale

The company isn't just riding the wave—it's reshaping it. A joint venture with Lockheed Martin to build a missile and rocket manufacturing center in Germany (targeting 10,000 units annually by 2027) signals ambition. Similarly, its partnership with Finnish startup ICEYE to produce reconnaissance satellites underscores its push into next-gen tech.

But the key metric is capacity: Rheinmetall aims to triple revenue to €30–40 billion by 2030. To do this, it's expanding factories in Germany, Lithuania, and Romania while leveraging its 50% share of Germany's special defense fund. CEO Armin Papperger's focus on “digitalization and ammunition” reflects a strategy to capture every slice of the defense pie.

UBS's Bullish Case: Valuation at a Crossroads

UBS's revised €2,200 price target (up from €1,800) hinges on two pillars: Rheinmetall's market share and scalability. The firm projects 26% annual revenue growth through 2028, with EBIT margins hitting 20% by 2030. Its sum-of-the-parts model values the defense segment at 11.3x EBIT by 2030—a multiple aligned with pre-Ukraine war averages. The upside scenario is even more aggressive: If NATO allies hit the 5% GDP target, sales could reach €60 billion by 2033, pushing shares to €1,685. UBS sees near-term risks—like budget delays or U.S. competition—as manageable, noting that “structural demand is too strong to ignore.”

Historical backtests from 2020 to 2025 reveal that a strategy of buying RHMM on quarterly earnings announcements and holding for 60 days produced an average return of 21.11%, though with a maximum drawdown of 21.87%, underscoring both opportunity and volatility.
Backtest the performance of Rheinmetall (ETR: RHMM) when 'buy condition' is triggered on quarterly earnings announcements, holding for 60 trading days, from 2020 to 2025.

The Risks: Geopolitics and Capacity Constraints

No investment is without pitfalls. The first hurdle is execution: tripling revenue in six years requires flawless supply chain management. Delays in plant expansions or U.S. trade restrictions could crimp margins. Additionally, competition from giants like Lockheed or Raytheon remains a threat, though Rheinmetall's European focus offers a moat.

Geopolitical uncertainty is another wildcard. If NATO's spending pledges falter—or if the Ukraine war de-escalates—demand could soften. Yet UBS argues that the “pent-up need for modernization” ensures resilience.

Conclusion: A Play for the Long Game

Rheinmetall's trajectory is clear: It's the best-positioned European defense contractor to capitalize on NATO's rearmament. With UBS's stamp of approval and a backlog that stretches into the 2030s, this stock is a buy for investors willing to bet on a multiyear defense boom. The risks are real, but the structural tailwind is undeniable. For now, the question isn't whether to invest—it's how much.