Rheinmetall's Rise and the Reshaping of European Defense Markets

The inclusion of Rheinmetall AG in the Euro Stoxx 50 on June 20, 2025, marked a pivotal moment for European defense stocks. Replacing Kering SA, a luxury goods giant, Rheinmetall’s entry was driven by a 181% surge in its stock price, fueled by a continent-wide rearmament cycle [1]. This shift reflects a broader realignment of capital toward sectors aligned with geopolitical realities, as European nations pivot to counter hybrid threats and sustain military readiness [2]. The move also underscores the growing influence of defense contractors in shaping financial markets, with Rheinmetall now joining the index’s elite 50 companies [3].

A Structural Shift in Defense Spending

European defense budgets have undergone a seismic transformation. Total expenditure by EU member states rose by over 30% from 2021 to 2024, reaching €326 billion—1.9% of EU GDP [4]. For NATO-aligned EU members, spending hit 1.99% of GDP in 2024 and is projected to climb to 2.04% in 2025 [5]. This structural growth, driven by the Ukraine war and NATO’s readiness initiatives, has created a durable tailwind for defense firms. Germany’s abandonment of its fiscal restraint, including a €100 billion war-chest fund, exemplifies this shift [6].

Rheinmetall, Germany’s largest defense contractor, has capitalized on this momentum. Its order book surged to €63 billion in Q1 2025, with a €30 billion backlog, reflecting robust demand for its high-margin products, including AI-powered battlefield systems and drone solutions [7]. The company’s 2024 revenue grew 36% to €9.75 billion, with an ammunition division posting a 28.4% operating margin—well above industry averages [8].

The “Nvidia of Defense” Analogy

Rheinmetall’s ascent has drawn comparisons to Nvidia, a high-growth industrial play. Both companies are reshaping their sectors through technological innovation: Rheinmetall with next-generation defense systems, Nvidia with AI chips. However, the analogies diverge in risk profiles. While Nvidia’s growth is driven by private-sector demand, Rheinmetall’s fortunes are tied to government contracts, which are subject to political and fiscal constraints [9].

Valuation metrics highlight this divergence. Rheinmetall trades at a P/E ratio of 91.6x, significantly higher than the European Aerospace & Defense industry average of 33.0x [10]. Analysts project 60% earnings growth over the next few years, which could justify the premium if the company maintains its momentum [11]. Yet, unlike Nvidia’s 200x+ multiples in 2023, Rheinmetall’s valuation remains anchored to its government-dependent business model [12].

Risks and Geopolitical Uncertainties

Despite its strong fundamentals, Rheinmetall faces headwinds. Geopolitical volatility could disrupt supply chains or shift priorities away from defense. Overcapacity in the sector—driven by rapid rearmament—may also pressure margins. Additionally, political shifts in Germany or other EU states could alter long-term spending commitments [13].

Conclusion

Rheinmetall’s inclusion in the Euro Stoxx 50 and its role in a defense supercycle position it as a compelling long-term play. The company’s alignment with structural growth in European defense spending, coupled with its technological edge, suggests a durable competitive advantage. However, investors must weigh the valuation premium against the sector’s inherent risks. As the EU’s defense budgets continue to expand, Rheinmetall’s ability to navigate political and fiscal uncertainties will determine whether it becomes a true “Nvidia of defense” or a cautionary tale of overvaluation.

Source:
[1] Stoxx Ltd.
https://stoxx.com/rheinmetall-joins-euro-stoxx-50-amid-surge-in-europes-defense-stocks/
[2] Bloomberg
https://www.bloomberg.com/news/articles/2025-06-03/rheinmetall-to-replace-kering-in-euro-stoxx-50-jpmorgan-says-mbg5ua42
[3] Morningstar
https://www.morningstar.com/news/dow-jones/202506202543/kering-replaced-by-rheinmetall-in-the-euro-stoxx-50-index
[4] Consilium.europa.eu
https://www.consilium.europa.eu/en/policies/defence-numbers/
[5] EP Think Tank
https://epthinktank.eu/2025/05/07/eu-member-states-defence-budgets/
[6] Saxo Bank
https://www.home.saxo/content/articles/equities/rheinmetall-the-nvidia-of-defence-21032025
[7] Ainvest.com
https://www.ainvest.com/news/rheinmetall-450-order-book-surge-great-defense-play-2508/
[8] Simplywall.st
https://simplywall.st/stocks/at/capital-goods/vie-rhm/rheinmetall-shares/valuation
[9] Devere Group
https://www.devere-group.com/is-it-too-late-to-invest-in-european-defence-stocks/