ASX defence shares have delivered some of the most extraordinary returns on the market over the past three years.
Electro Optic Systems Holdings Ltd (ASX: EOS) is up around 126% over twelve months, against a gain of roughly 1% for the S&P/ASX 200 Index (ASX: XJO).
DroneShield Ltd (ASX: DRO) climbed from under a dollar to $6.70 at its peak.
Austal Ltd (ASX: ASB) more than doubled through 2025.
Yet two of those three have since halved, which begs the question: Is it too late to buy ASX defence shares?
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Why ASX defence shares ran so hard
Global military spending has climbed sharply, drone warfare has become a defining feature of modern conflict, and AUKUS commits Australia to decades of naval investment.
Order books reveal much more about companies than their share prices do.
EOS reported a record order book of $846 million at 30 June, up 84% from $459 million at the end of 2025.
On the other hand, Austal's order book sits above $17 billion following the $4 billion Landing Craft Heavy contract signed in February.
Recent earnings and trading updates
DroneShield gave the market fresh numbers on 28 July, albeit not a full earnings release. First-half 2026 revenue is expected at $125.8 million, up 74% on the prior corresponding period. Committed FY 2026 revenue reached $206 million, already 95% of everything the company billed across all of 2025.
Management guided full-year revenue to between $250 million and $270 million.
Recurring revenue reached $14.2 million, or 11.3% of first-half revenue. Gross margin, however, came in around 60%, below the 65% recorded a year earlier.
The half-year result is due on 26 August.
EOS, for its part, lifted its FY26 base business revenue guidance to between $280 million and $300 million. Available cash stood at $256 million, with a further $30 million in undrawn debt facilities.
Notably, that guidance excludes any contribution from MARSS, the European command-and-control business acquired in May.
Austal is the outlier of the group.
The shipbuilder cut FY26 EBIT guidance to approximately $110 million after discovering an overstatement tied to incentives within its US operations. Half-year revenue still rose around 34% to approximately $1.1 billion.
The case against chasing ASX defence shares
Share prices have moved in the opposite direction to those order books.
DroneShield traded near $1.92 in late July, roughly 66% below its 52-week high.
Austal fell to a 52-week low of $3.33, against a 52-week high of $8.82.
Both moves reflect something other than a demand problem.
DroneShield disclosed an ASIC investigation in May and has worked through a leadership transition, whereas Austal's accounting error revived long-standing questions about margin recognition on complex fixed-price defence contracts.
It seems that governance is doing most of the damage.
There is a valuation issue as well.
Defence contracts are lumpy, back-loaded, and dependent on government procurement cycles. As such, revenue can look spectacular one half and flat the next.
Paying a high multiple for that pattern of earnings requires real conviction, particularly when a single delayed contract can turn a strong half into a weak one.
Foolish Takeaway
The theme behind ASX defence shares has not broken. If anything, the order books are stronger now than they were when these stocks traded at their highs.
What has changed is investor trust in execution and disclosure.
That is a fixable problem, but it gets fixed slowly and only through results that are actually delivered.
The August reporting period gives all three companies a chance to do exactly that.
