Two ASX Small Cap Defence Stocks Set for Growth: DroneShield Ltd and Electro Optic Systems

The Australian defence sector is experiencing a major growth phase in 2025, driven by rising global tensions, increased government spending, and rapid technological innovation. From advanced surveillance to autonomous defence systems, Australia’s smaller defence players are emerging as strong contenders in a market once dominated by large global contractors.

For investors looking to capitalize on this surge, ASX small-cap defence stocks present an exciting opportunity. Among them, two companies stand out for their innovation, contract wins, and international growth potential: DroneShield Ltd (ASX: DRO) and Electro Optic Systems Holdings Limited (ASX: EOS).

Let’s take a closer look at why these two companies could be set for explosive growth.

DroneShield: Riding the Wave of Counter-Drone Innovation

In an era where drones have become both indispensable tools and potential security threats, DroneShield Ltd has carved a niche for itself as Australia’s leading counter-drone technology company. Founded in 2014, DroneShield has built an impressive global reputation for its advanced solutions that detect, identify, and neutralize unauthorized drones — a technology increasingly critical for military, airport, and critical infrastructure security.

Recent Developments and Growth Drivers

2025 has been a breakout year for DroneShield. In October 2025, the company announced a $13 million investment to establish a new research and development (R&D) facility in South Australia. This cutting-edge center will focus on developing next-generation counter-drone systems and create dozens of high-skilled engineering jobs.

Over the past year, DroneShield’s global workforce nearly doubled to 400 employees, a testament to its expanding operations and growing international demand. Much of this growth has been driven by contract wins in Europe, the U.S., and Ukraine — regions where defence budgets are rapidly rising due to heightened geopolitical tensions.

One of the biggest milestones came with a $61.6 million contract with a European military customer, solidifying DroneShield’s position as a trusted global supplier. These achievements have not gone unnoticed by the market—DroneShield’s share price recently surged to a record $6.70, reflecting strong investor confidence in its trajectory.

Financial Highlights

DroneShield’s financial performance paints a picture of a company transitioning from a high-potential start-up to a profit-generating defence leader:

1. Half-year 2025 revenue: $72.6 million, up 210% year-over-year.
2. Net profit: $2.12 million, marking a shift from prior years of losses.
3. SaaS revenue growth: 177% year-over-year, as the company diversifies toward recurring software-driven income.

The company’s project pipeline is valued at $2.33 billion, and it has already deployed over 4,000 systems worldwide. This indicates a strong foundation for continued expansion as global militaries prioritize drone defence technology.

Why Investors Are Watching

DroneShield’s success story lies in its first-mover advantage and technology leadership. As governments and security agencies grapple with drone-related risks — from border surveillance to battlefield defence — DroneShield’s solutions are becoming mission-critical. With recurring revenue streams and increasing international exposure, the company is well positioned for sustained long-term growth.

• Electro Optic Systems (ASX: EOS): Powering Advanced Defence Hardware

Electro Optic Systems Holdings Limited (EOS) is another Australian small-cap defence stock making waves in 2025. Unlike DroneShield’s software-centric model, EOS focuses on hardware-driven defence solutions, particularly electro-optic systems and remote weapon stations (RWS) that enhance the precision, surveillance, and strike capabilities of military platforms across land, air, and sea.

Recent News and Contract Wins

2025 has been nothing short of transformative for EOS. Its share price has skyrocketed over 600% year-to-date, driven by renewed investor confidence and a series of strategic contract wins.

The standout achievement was securing an $108 million contract with the Australian Defence Force (ADF) under the LAND 400 program. This deal involves supplying Remote Weapon Systems — a cornerstone of modern combat vehicles — with deliveries scheduled between 2025 and 2027.

Despite a recent analyst downgrade anticipating modest revenue growth of 4.3% to $ 120 million in 2025, market sentiment remains broadly positive. Investors appear focused on EOS’s expanding contract book and its potential to turn operational momentum into profitability over the next two years.

Financial Overview

EOS reported assets worth $401 million as of December 2024, underlining a strong balance sheet for a small-cap company. The firm’s R&D focus remains central to its growth strategy, with substantial resources directed toward new defence technologies, including directed energy and laser systems — a promising new frontier in modern warfare.

Broker Bell Potter has labeled the next six months as “catalyst-rich” for EOS, pointing to potential new contract announcements worth tens of millions and advancements in laser-based weapon systems that could significantly elevate the company’s market position.

Why Investors Are Watching

EOS offers investors exposure to the hardware backbone of global defence modernization. As militaries increasingly invest in automated weapon systems and precision targeting, EOS’s technologies are well aligned with future procurement trends. The company’s turnaround story, backed by strong contract wins, makes it an intriguing play for those seeking high-growth potential in a sector with increasing government support.

Why These Defence Stocks Matter for Growth Investors

Both DroneShield and Electro Optic Systems represent the new generation of Australia’s defence technology ecosystem — innovative, agile, and globally relevant. While they operate in different niches, both share several attributes that make them attractive to investors in 2025:

1. Strong global demand: Rising geopolitical tensions are fueling defence spending worldwide, benefiting both companies.
2. Technological innovation: From DroneShield’s AI-driven detection systems to EOS’s laser weapon research, both firms are at the cutting edge of defence innovation.
3. Contract momentum: With multi-million-dollar deals already secured and active pipelines, revenue visibility is improving.
4. High growth potential: As small-cap players, they offer significantly higher upside potential compared to larger defence contractors.

Final Thoughts: Two Stocks, One Strategic Theme

Australia’s defence sector is evolving rapidly, and the global environment is creating unprecedented opportunities for companies that can deliver high-tech, reliable, and scalable solutions.

DroneShield (ASX: DRO) is leading the charge in the fast-growing field of counter-drone warfare, with strong profitability momentum and a global footprint expanding across multiple continents. Electro Optic Systems (ASX: EOS), on the other hand, is redefining advanced defence hardware with its remote weapon systems and laser-directed energy projects.

Both companies are well aligned with the broader trend of increased defence spending and technology-driven warfare, making them compelling options for investors seeking exposure to this strategic growth sector.

While small caps inherently carry higher risk, the innovation, contract wins, and strong execution demonstrated by DroneShield and EOS make them two of the most promising ASX small-cap defence stocks to watch in 2025.

Disclaimer:

General Financial Product Advice and Regulatory Framework: Pristine Gaze Pty Ltd (ABN 66 680 815 678, ACN 680 815 678) operates as Corporate Authorised Representative (CAR No. 001312049) of Alpha Securities Pty Ltd (AFSL 330757), which is licensed and regulated by the Australian Securities and Investments Commission under the Corporations Act 2001 (Cth). This report contains general financial product advice only and has been prepared without consideration of your personal objectives, financial situation, specific needs, circumstances, or investment experience. The information is not tailored to individual circumstances and may not be suitable for your particular situation. Before acting on any information contained herein, you should carefully consider its appropriateness having regard to your personal objectives, financial situation, and needs, and consider seeking personal financial advice from a qualified financial adviser who can assess your individual circumstances and provide tailored recommendations.

Investment Risks and Market Warnings: All investments carry significant risk, and different investment strategies may carry varying levels of risk exposure including total loss of invested capital. The value of investments and income derived from them can fluctuate significantly due to market conditions, economic factors, company-specific events, regulatory changes, commodity price volatility, currency fluctuations, interest rate movements, and other factors beyond our control. Securities markets are subject to market risk from general economic conditions and investor sentiment, liquidity risk affecting the ability to buy or sell securities at desired prices, credit risk from issuer default or deterioration, operational risk from inadequate internal processes, sector-specific risks including industry regulatory changes, technology obsolescence, management changes, competitive pressures, supply chain disruptions, and mining-specific risks including resource estimation uncertainty, operational hazards, environmental compliance, permitting delays, commodity price cycles, geopolitical factors affecting mining operations, and exploration risks. Small-cap and speculative mining stocks carry additional risks including limited liquidity, higher volatility, dependence on key personnel, limited operating history, uncertain cash flows, and potential failure to achieve commercial production.

Information Accuracy and Limitations: While we endeavour to ensure information accuracy and reliability, we make no representations or warranties (express or implied) regarding the accuracy, reliability, completeness, timeliness, or suitability of information provided, except where liability cannot be excluded under applicable law. This report may include information from third-party sources including company announcements, regulatory filings, research reports, market data providers, financial news services, and publicly available information, which we do not independently verify and for which we assume no responsibility. Past performance, examples, historical data, or projections are not indicative of future results, and no guarantee of future returns is provided or implied. To the maximum extent permitted by law, Pristine Gaze Pty Ltd and Alpha Securities Pty Ltd, together with their respective directors, officers, employees, representatives, and related entities, exclude all liability for any errors, omissions, inaccuracies, loss or damage (including direct, indirect, consequential, or special damages) arising from reliance on information provided, investment decisions made based on this report, market losses, opportunity costs, and technical issues or system failures.