Saab's Soaring Valuation Amid Defense Sector Hype: A Cautionary Investment Analysis

The defense sector has become a magnet for investor capital in 2025, fueled by geopolitical tensions ranging from the Russia–Ukraine war to escalating conflicts in the Middle East. Saab AB (STO:SAAB.B), the Swedish defense contractor, has emerged as a standout performer, with its stock surging 153.37% over the past year and a trailing P/E ratio of 58.81 as of October 2025, according to StockAnalysis statistics. While this growth reflects robust demand for defense systems and Saab's strategic positioning in high-margin markets, analysts and investors must scrutinize whether the stock's valuation aligns with fundamentals or if it has become a casualty of sector-wide overhype.

Saab's Financial Momentum and Market Optimism

Saab's recent financial performance has been nothing short of impressive. For the 12 months ending June 2025, the company reported revenue of SEK 69.97 billion, driven by strong order intake in its Dynamics division (ground combat systems) and sustained demand for its Gripen fighter jets, according to Saab Q2 2025 results. The firm's Q2 2025 results, released in July, saw operating income rise to SEK 1.98 billion, prompting an upgraded sales growth forecast of 16%–20% for 2025, per an Invezz report. This outperformance has translated into a soaring market capitalization of SEK 303.95 billion, up from SEK 120 billion in early 2023 (per StockAnalysis statistics).

However, the stock's meteoric rise has been accompanied by a sharp increase in valuation multiples. Saab's P/E ratio has ballooned from a historical low of 23.8 in 2023 to a forward P/E of 47.90 in October 2025, a trend that mirrors broader sector movements where European defense budgets are projected to grow at 6.8% annually through 2035, according to a Morningstar analysis. Yet, such rapid multiple expansion raises questions about sustainability, particularly as geopolitical-driven optimism may not always translate into consistent earnings.

Analyst Sentiment: Optimism vs. Caution

Analyst ratings for Saab remain polarized. Following its Q2 results, firms like SEB and Kepler Cheuvreux upgraded their outlooks, citing Saab's capacity expansion and digital transformation initiatives as competitive advantages (as reported by Invezz). However, others, including Danske Bank, have maintained "Reduce" or "Sell" recommendations, warning that the stock's valuation may not justify its long-term growth potential, per Saab's press release. This divergence underscores a critical tension: while Saab's near-term prospects are bolstered by defense budget increases, its ability to sustain profitability hinges on securing long-term contracts in an environment of shifting political priorities.

The defense sector's reliance on government contracts introduces unique risks. For instance, U.S. defense spending, which accounts for 35% of global defense budgets, is concentrated among four contractors (Lockheed Martin, Northrop Grumman, etc.), creating a fragmented competitive landscape (per Morningstar analysis). Saab, while dominant in its niche markets, faces challenges in scaling its operations to match the global reach of its peers. Additionally, geopolitical volatility-while a tailwind for demand-can also lead to abrupt shifts in procurement priorities, as seen in the EU's recent pivot toward artillery systems (noted in the Morningstar analysis).

Sector-Wide Overvaluation Risks

The defense sector's current valuation premium is partly a function of its perceived safety amid global instability. However, this "geopolitical beta" comes with caveats. A 2024 study found that 81.4% of defense companies exhibited significant stock price reactions to geopolitical risk events, such as the Russia–Ukraine war. While this sensitivity can drive short-term gains, it also amplifies exposure to policy reversals and program cancellations. For example, Saab's forward P/E of 47.90-nearly double its 2023 level-assumes continued defense spending growth, a bet that could sour if political will wanes or fiscal constraints emerge.

Moreover, the sector's ESG risks are gaining scrutiny. Defense firms face mounting pressure to address human rights concerns and environmental impacts, particularly in conflict zones. While Saab has invested in AI and digital technologies to enhance efficiency (reported by Invezz), its operations remain inherently tied to military activities, which could attract regulatory or reputational headwinds.

Conclusion: Balancing Opportunity and Caution

Saab's stock has clearly benefited from the defense sector's tailwinds, with its financials and strategic initiatives warranting optimism. However, investors must weigh this against the risks of overvaluation and sector-specific vulnerabilities. The company's upgraded 2025 guidance and strong order backlog are positives, but the path to translating these into long-term value depends on navigating geopolitical uncertainties and maintaining operational discipline.

As the Q3 2025 earnings report approaches on October 24 (per Saab's Q2 release), the market will be watching for signs that Saab can sustain its momentum without relying on speculative fervor. For now, the stock's valuation appears to reflect a future where defense demand remains unrelenting-a scenario that may not hold if global tensions ease or fiscal policies shift. In a sector where geopolitical hype often outpaces fundamentals, prudence remains the investor's best ally.