Top 2 Small Cap Defence Stocks to Watch on ASX

The ASX Defence Boom: Ready For Take-Off!

The defence sector on the ASX is heating up, driven by surging global military spending and Australia’s growing position as a technology innovator. Among the many players, two small-cap gems—DroneShield (ASX: DRO) and Electro Optic Systems (ASX: EOS)—stand out. Both companies deliver cutting-edge defence technologies that are gaining momentum in global markets. Their innovations are no longer futuristic concepts; they are already generating significant contracts, revenues, and investor interest. Let’s dive into why these two stocks are leading the tech frontier in defence for 2025.

DroneShield (ASX: DRO): The Counter-Drone Pioneer

DroneShield has emerged as a global leader in counter-drone and electronic warfare technology. Their portfolio includes portable detection systems and advanced AI platforms that help militaries and governments neutralise threats from rogue drones—a fast-growing security concern worldwide.

Financial Highlights

In FY24, DroneShield posted revenues of $57.5 million, marking a steady 6% year-on-year increase. Although still operating at a net loss of around $1.3 million, the company boasts a strong gross margin of 71.7%, underscoring operational efficiency amid investment in growth.

Contracts and Global Reach

DroneShield recently secured a record $61.6 million in European military contracts—exceeding its full-year FY24 revenue. All equipment delivery is expected by Q3 2025, providing clear revenue visibility. The company’s sales pipeline now stands at a massive $2.4 billion, with 43% of opportunities in Europe and 29% in the US. Indeed, 91% of DroneShield’s revenues come from overseas clients, with the US market alone contributing about 70%.

Expansion and Innovation

A $13 million investment is underway in a new production and R&D facility in Sydney, gearing DroneShield to meet the increasing demand for sophisticated drone and electronic warfare technologies. CEO Craig Scroggie highlights the accelerating growth fueled by global hyperscale and enterprise customers, as well as strong contract momentum.

Why DroneShield is a Defence Tech Leader

DroneShield commands a unique position on the frontline of the growing counter-drone market. Governments and militaries worldwide are pouring resources into securing airspace from drone threats, and DroneShield’s advanced, scalable solutions place it at the vanguard of this mega-trend.

Electro Optic Systems (ASX: EOS): Revolutionizing Defence with Lasers and Satellites

Electro Optic Systems is pioneering new frontiers in defence technology — from high-power lasers and remote weapon systems to space and communication technologies. EOS designs cutting-edge solutions that increasingly capture contracts focused on anti-drone lasers and next-generation surveillance.

Financial Snapshot

EOS reported revenues of $176.56 million for the first half of FY24, an impressive 9% increase year on year. Despite a net loss of $12 million (reflecting significant R&D and scaling investments), the company maintains $41 million in cash, positioning it well to fund ongoing expansion.

Recent Breakthroughs and Contracts

A landmark $125 million contract in August 2025 with a European NATO member government will see EOS deliver a 100kW-class high-power laser weapon capable of disabling up to 20 incoming drones per minute — performance metrics 5-10x better than existing solutions. This places EOS on track to capture roughly 50% of the global high-energy laser weapons market, with promising demand from Europe and Asia.

Growth and Market Momentum

EOS shares have surged roughly 300% over recent months on the back of its “company maker” laser contract and strong pipeline visibility. The company’s global reach, including teams and partners in Australia, US, France, and India, enhances its ability to deliver complex, custom defence solutions.

Why EOS is on the Tech Edge

EOS’s cutting-edge laser and motion sensor systems position it uniquely to benefit from increased defence spending focused on emerging threat areas like drone swarms and space-based surveillance. Their advanced technologies align perfectly with modern defence priorities.

Why These Two Are Leading Australia’s Tech-Enabled Defence Boom

1. Surging defence budgets: Global governments are dramatically increasing spending to counter evolving threats, amplifying commercial opportunity for leaders like DroneShield and EOS.
2. Strong contract visibility: Both companies boast substantial contracted revenues and pipelines—DroneShield’s $2.4 billion, EOS’s $125 million—but also broader addressable markets that continue growing rapidly.
3. Australian innovation: Skilled local R&D and manufacturing underpin their competitive advantage, making these stocks an exciting blend of technology and growth.

Risks to Consider

1. Ongoing losses: Both companies operate with net losses currently, reflecting necessary growth investments — typical but important to note for cautious investors.
2. High volatility: Share prices have been volatile, driven by contract announcements and sentiment swings. These remain high-beta stocks with greater risk/reward profiles.

Final Thoughts: Defending Your Portfolio with Innovation

For investors chasing the next wave of tech-fueled growth, DroneShield and EOS deliver exposure to frontier defence technologies reshaping modern security. Their recent contract wins, expanding global footprints, and ongoing R&D investments suggest they aren’t just riding the wave — they’re helping to build it.

If you’re ready to add a dose of innovation to your portfolio and back Australia’s emerging tech champions, keep a close eye on these two ASX leaders. The frontier of defence tech is arriving fast — and DroneShield and EOS are flying high at the helm.

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