2 ASX Small-Cap Defence Stocks Set for Growth
As geopolitical tensions intensify and nations ramp up their defence budgets, investors are increasingly turning their attention to the booming defence technology sector. On the Australian Securities Exchange (ASX), two small-cap players — DroneShield Ltd (ASX: DRO) and Electro Optic Systems Holdings Ltd (ASX: EOS) — are emerging as standout names riding this powerful global trend.
Both companies combine cutting-edge innovation with strong contract pipelines, making them prime contenders for investors seeking exposure to the rapidly growing defence industry in 2025 and beyond. Let’s take a closer look at why these two stocks could be the next big winners in Australia’s defence ecosystem.
DroneShield Ltd (ASX: DRO): The Counter-Drone Crusader
Few sectors within defence are expanding as rapidly as counter-drone technology, and DroneShield Ltd is at the forefront of this evolution. The company specializes in counter-unmanned aerial systems (C-UAS) — advanced tools designed to detect, track, and neutralize hostile drones that pose security risks to military and civilian operations.
Explosive Growth and Record Financials
DroneShield’s 2025 performance has been nothing short of exceptional. For the first half of FY2025, the company reported record revenue of $72.32 million, representing a 210% year-on-year increase. This surge reflects both increased demand and DroneShield’s ability to convert its order pipeline into deliverables efficiently.
Moreover, operating cash outflow narrowed by 86%, signaling tighter cost controls and better cash flow management. By September 2025, the company’s cash balance reached $202 million, providing a strong capital base for scaling production and fulfilling upcoming orders.
This financial transformation has turned DroneShield into one of the most promising small-cap stories on the ASX — a company with real revenues, operational discipline, and expanding global credibility.
Major Contract Wins and International Traction
DroneShield’s momentum is underpinned by a stream of significant contracts. In November 2025, it secured $7.6 million worth of handheld counter-drone system orders, all scheduled for delivery and payment between Q4 2025 and Q1 2026. These orders came from a repeat U.S. government customer, underscoring trust in DroneShield’s technology and reliability.
This follows several other international deals across Europe, the Middle East, and Asia, as global defense forces seek reliable drone-neutralization solutions.
Notably, DroneShield’s contract pipeline now exceeds $2.3 billion, highlighting the company’s long-term revenue potential. With increasing threats from rogue drones and surveillance systems, governments are rapidly adopting counter-drone technologies — a sector expected to grow over $10 billion globally by 2030.
Strategic Edge and Market Outlook
DroneShield’s technology edge lies in its AI-driven signal processing and electronic warfare expertise, giving it the capability to detect drones across frequencies and neutralize them without kinetic damage.
The firm’s strategic partnerships and ongoing expansion into North America and Europe strengthen its market position. With repeat business from government and military clients, DroneShield has established a durable competitive moat.
As defence budgets rise and nations focus on protecting critical infrastructure from drone attacks, DroneShield appears well-positioned to capture a significant slice of this booming market.
Electro Optic Systems Holdings Ltd (ASX: EOS): Precision and Turnaround Potential
While DroneShield is enjoying explosive growth, Electro Optic Systems (EOS) offers an intriguing turnaround opportunity in 2025. Specializing in advanced weapon systems, laser technology, and space communication platforms, EOS has long been a name associated with cutting-edge defence innovation. After facing challenges in recent years, the company now appears to be finding its footing again.
Improving Financial Health
EOS’s turnaround is becoming visible through its improving financial metrics. For FY2024, the company posted revenue of $176.6 million, up 9% year-on-year, with a net loss after tax of $18.7 million. Importantly, cash reserves stood at a healthy $41.1 million, giving EOS enough liquidity to fund operations and R&D.
Looking ahead, analysts expect EOS to generate around $120 million in revenue in 2025, reflecting a modest growth trajectory but a much sharper improvement in profitability. The company’s projected EPS loss is expected to narrow to just five cents per share, a dramatic improvement from previous years’ steep losses.
These numbers suggest EOS is moving toward a sustainable recovery, focusing on operational efficiency and selective, high-margin contracts.
Strong Market Rebound and Share Price Rally
Investors have already started to recognize the turnaround story. EOS shares have surged more than 600% year-to-date, driven by renewed optimism and strong contract momentum.
The company’s renewed focus on core defence contracts and space-based laser technology has attracted fresh analyst coverage and investor attention. EOS’s weapon systems and optical targeting products are gaining traction among NATO members and allied militaries, offering high export potential.
Growth Catalysts Ahead
Several near-term growth catalysts could continue driving EOS’s recovery:
- New contracts: The company has secured multiple deals with Australian and overseas defence departments in 2025.
- Laser innovation: NATO’s adoption of Australian-made anti-drone laser systems has positioned EOS as a credible global supplier in emerging military technologies.
- Streamlined operations: A renewed focus on core strengths — defence and space systems — is helping EOS cut non-core costs and improve efficiency.
If management maintains its current trajectory, EOS could emerge as one of the most remarkable small-cap turnarounds in the Australian defence space.
Why These Defence Stocks Stand Out
Both DroneShield and EOS are benefitting from the same macro trend — a global surge in defence spending, driven by rising geopolitical tensions, rapid technological innovation, and the increasing importance of AI and automation in warfare.
DroneShield (DRO):
- Proven product-market fit with strong recurring orders
- Contract pipeline exceeding $2.3 billion
- Explosive revenue growth (+210% YoY) and strong cash position
Electro Optic Systems (EOS):
- Significant share price recovery (+600% YTD)
- Operational turnaround with narrowing losses
- Exposure to space tech and advanced weapon systems
Together, they provide investors two different but complementary plays in the defence sector — one focused on hyper-growth in drone security and the other on precision systems and space technology recovery.
Final Take: Small Caps, Big Potential
The world is entering a new era of defence modernization, and Australian innovators like DroneShield and EOS are punching above their weight globally.
DroneShield’s record-breaking financials, robust order book, and strong execution give it the momentum of a growth powerhouse. EOS, on the other hand, offers an appealing turnaround story with significant upside as its high-tech defence and laser systems gain global recognition.
For investors with a long-term outlook, these two ASX small-cap defence stocks could provide meaningful exposure to one of the fastest-growing sectors of the decade — where technology, security, and innovation intersect.
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.
