DroneShield Ltd (ASX: DRO) shares have been an incredible investment over the past few years.
During this time, the counter-drone technology company has gone from being a relatively unknown small-cap ASX defence stock to a $3.3 billion ASX 200 share.
Investors may now be wondering which stock could follow in its footsteps. Well, let's look at one defence stock that Bell Potter is tipping as a buy.
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Which ASX defence stock?
The stock in question is Elsight Ltd (ASX: ELS).
It is a supplier of communication modules to drone manufacturers, offering advanced communication components for unmanned systems through its flagship product, the Halo platform.
This platform aggregates all available communication paths into one resilient, encrypted pipe for beyond visual line of sight (BVLOS) control, video and telemetry.
Bell Potter has been looking at trends in the drone industry and believes it points to strong demand for Elsight's technology. It said:
US and Europe are severely lacking UAS production capacity when compared to Ukraine and adversaries. In a single instance, China ordered ~1m Kamikaze UAS for delivery in 2026. In comparison, the US reportedly procured 50k UAS annually prior to 2026. Governments globally have responded to this deficiency: (1) US budgets US$9.4b in FY26 for autonomous systems and seeks "Drone Dominance"; (2) US is fast-tracking procurement as highlighted by LUCAS, a reverse-engineered Shahed-136 copy, that went from prototype to combat deployment over Iran in seven months, signalling the US will procure expendable UAS at speed; and (3) Germany plans to invest €10.0b in UAS with contracts flowing.
EPS changes are +10%/+30%/+38% over CY26/27/28e, reflecting higher revenue due to our observation of greater than anticipated demand and production of non-FPV UAS in Europe, US and Ukraine; offset partially by higher install base attrition rates due to continued expected conflict. TP upgraded on higher free cash flows.
Should you invest?
According to the note, the broker has retained its buy rating on the ASX defence stock with an improved price target of $8.00 (from $5.80).
Based on its current share price of $6.80, this implies potential upside of 18% for investors.
Bell Potter concludes:
We retain Buy. We believe ELS has developed a market leading product that is leveraged to the proliferation of unmanned systems in both a defence and commercial context. We believe ELS shares offer relative value versus listed peers at 43x CY26e EV/EBIT given its recurring revenue, high ROIC business model and defensible niche. We expect the key driver for ELS shares will be revenue upgrades from OEM 1(>80% of CY25 revenue) production capacity expansion and BlueUAS list entry.
