The global security landscape has shifted dramatically in recent years.
Countries around the world are increasing their spending commitments, led by Europe and the United States, which are investing more and more into their defence budgets.
Australia has a vibrant defence industry that will benefit from this structural tailwind.
The question for investors is which stocks can best capture this opportunity?
Image source: Getty Images
DroneShield Ltd (ASX: DRO)
DroneShield has become one of the most closely watched and exciting defence technology stocks on the ASX, and for good reason.
The company develops artificial intelligence-enabled counter-drone systems used by military forces, governments, and critical infrastructure operators around the world.
In FY 2025, DroneShield posted revenue of $216.5 million, up 276% year on year, and a $3.5 million profit.
The company also reported a $2.3 billion sales pipeline and confirmed that $104 million in revenue for 2026 had already been secured.
It is still early days in the DroneShield story, and with a premium valuation, many risks still exist for the investment thesis.
But the focus on counterdrone technology is definitely a strong tailwind that will provide many future growth opportunities.
A recent pullback in the share price due to an ongoing ASIC investigation may provide investors with an attractive entry point.
The one question investors should be asking is to what point this future growth has already been priced in?
Electro Optic Systems Holdings Ltd (ASX: EOS)
Electro Optic Systems develops and manufactures advanced electro-optic technologies for defence and space markets, including remote weapon systems, high energy laser weapons, and counter-drone solutions.
Clearly in a massive growth phase, the company signed $424 million worth of contracts during FY 2025, compared to just $70 million in FY 2024.
Key wins included a $125 million high energy laser weapon export contract, the world's first of its kind, a $108 million LAND 400-3 remote weapon systems contract, and multiple Slinger counter-drone system orders.
The company ended FY 2025 with $106.9 million in cash after repaying all borrowings, giving it a clean balance sheet heading into a busy delivery year.
Bell Potter seems to agree on the positive direction of the company:
We retain our Buy rating and [increase] our TP to $10.40 on lower CY27e earnings. EOS is positioned as a market leader in C-UAS solutions, particularly in directed energy, and is leveraged to increasing budget allocations to C-UAS technologies. Through both its kinetic and directed energy solutions, EOS has a long runway for growth.
Austal Ltd (ASX: ASB)
Austal is a more established name in the defence space and offers a compelling investment proposition.
The company is Australia's largest defence shipbuilder, designing and constructing advanced naval and patrol vessels for governments and defence forces around the world, operating yards in Australia, the United States, Vietnam, and the Philippines.
Austal has had great momentum as of late, winning many key contracts.
As of February 2026, Austal carried a record order book of $17.7 billion in contracted work, up from $13.1 billion just eight months earlier.
Recent highlights include a $1.029 billion contract to build 18 Landing Craft Medium vessels for the Australian Army, and a separate approximately $4 billion contract to build eight Landing Craft Heavy vessels under the Commonwealth's Strategic Shipbuilding Agreement.
Austal's contracts are often long term, providing a very sticky revenue base for the company.
Austal has over a decade of work now locked in, offering investors a level of revenue visibility that is rare among ASX-listed companies of its size.
Foolish Takeaway
The structural shift in global security spending looks set to persist for years.
DroneShield and EOS offer higher-risk, higher-upside exposure to this trend.
Austal, on the other hand, with a record order book and long-term government contracts already on hand, provides investors a more grounded and established investment opportunity.
