Laser Weapons, Drone Wars, and AUKUS: Why ASX Defence Stocks Are Surging in 2026

The war in Ukraine changed modern warfare. Low-cost drones began destroying tanks and equipment worth millions of dollars. Military leaders around the world took notice, and a global race to develop better drone technology quickly began.

Australia is right in the middle of this shift. The country’s defence budget is expected to reach A$56.2 billion by 2030, growing at an annual rate of 5.9%. On top of that, spending under the AUKUS submarine program alone is forecast to total A$18 billion through 2029, showing just how serious the long-term investment plans are.

‍The Spending Wave Is Bigger Than Australia

This is not just an Australian story. Every NATO member is now expected to meet the 2% of GDP defence spending floor in 2025, up from just three countries in 2014. European defence budgets jumped 17% in 2024. At the Hague summit in June 2025, NATO went further, agreeing to push spending to 5% of GDP by 2035.

What does this mean for investors? Defence spending is now a multi-year, structural commitment. The contracts flowing from this will take years to play out.

Within that wave, counter-drone technology is where the money is moving fastest. Australia launched Project LAND 156, a A$1.3 billion programme over the next decade. Globally, governments want solutions that stop drone swarms quickly and cheaply.

‍

Three ASX Defence Stocks Leading the Charge

Electro Optic Systems (ASX: EOS) won a A$125 million contract from a NATO country in August 2025 for a 100-kilowatt laser weapon, the first of its kind ever exported. It can shoot down up to 20 drones per minute at under 10 cents per shot. A second deal worth A$120 million was signed with South Korea in December 2025, though it remains conditional and is excluded from the secured backlog. Short seller Grizzly Research challenged the deal in February 2026; EOS rejected the claims as "misleading and manipulative." While the secured order backlog remains strong at about A$459 million, all eyes are on the company’s FY2025 results, releasing on Monday (Feb 23), for confirmation on whether the Korean conditions have progressed.

DroneShield (ASX: DRO) posted record revenue of A$216.5 million in FY2025, up 277% on the prior year, with over A$200 million in cash and zero debt. But things got messy in November 2025 when CEO Oleg Vornik sold his entire shareholding for roughly A$49.5 million. Shares fell 31% almost overnight. The stock has since stabilised around A$3.20, but the episode reminded investors that fast-growing small caps can be volatile.

For a steadier option, Austal (ASX: ASB) solidified its future on February 20, 2026, officially signing a landmark A$4 billion contract to build eight Landing Craft Heavy (LCH) vessels. These 100-metre ships, capable of carrying six Abrams tanks each, represent the second major win under the Strategic Shipbuilding Agreement. This deal pushes Austal’s order book to a record A$17 billion plus, providing the kind of long-cycle stability that balances out the volatility seen in smaller tech-focused defence plays.

What Could Go Wrong

No sector is without risk. AUKUS submarines are absorbing a big chunk of the defence budget, which could crowd out other programmes. Valuations have run hard; DroneShield's 52-week range of A$0.63 to A$6.71 tells that story. EOS faces execution risk on its conditional Korean deal and ongoing short-seller scrutiny. And insider selling at DroneShield shook confidence in late 2025.

Key Takeaways for Investors

Defence spending is structural, not cyclical. AUKUS, NATO's new targets, and the lessons of drone warfare point to a procurement cycle lasting years.

Counter-drone and laser weapons are the growth areas within that trend, both domestically and internationally.

Each ASX defence stock offers a different profile. EOS is a technology breakthrough story with short-seller noise to navigate. DroneShield delivers explosive growth with higher volatility. Austal, fresh off a record contract win, provides long-cycle, lower-risk exposure.

For a closer look at where the opportunities sit, download ASR's free Top-3 Stocks and Market Outlook Report for actionable research across the ASX.

‍