Defense is Interesting to Me, but all The Companies Suck

Along with airlines and makeup companies, defense has long been a stay-away for me. The inherent caps on the size of the market and the struggle to differentiate from the competition always bugged me. I also never bought into eternal pitch that “The world is a dangerous place right now, so defense is a good investment.” The world has always gotten more dangerous. There is always a new conflict, a new embargo, a new religious group freaking out. In 2018, the US and Iran “almost” got into a war, but people forgot about that in a few months and moved on to the next thing. However, I am becoming a smidgen interested in a long-term play on defense. The only problem is that I need a company.

I am finally buying into the hype. I think China will invade Taiwan before the end of the decade, I think the US people are feeling this Chinese fear, and the EU+other relatively powerful US allies are continuing to ramp up their spending. I do not know if we are heading for a WW3 scenario, and honestly, that does not really matter anyway. I do know that we are done with the 1990-2014 period where the US was the only Western nation spending on their military. While that is hyperbole, it is not an exaggeration to say that the EU and other Western nations have allowed their militaries to slip into worrying states. This is a sleep that Russia has snapped them out of, combined with rising US-China tensions. Germany, for example, allowed their nation’s military to become decrepit and weak is spending 100 billion euros over the next five years just to bring their military back up to date, a figure that will explode as Putin continues to posture.

Now you say something along these lines: “Well Henry, if everyone knows that defense spending will increase over the next five to ten years, where does the value come from? If this is information you found in a two-minute Google search, surely everyone else in the market, all of the professionals paid millions, will have already recognized this opportunity and invested billions in a split-second, where there was value in the investment.”

Here is where I think the value comes from.

If China declares war on Taiwan, or Russia attacks someone else post-Ukraine (which I think is unlikely), there are two possible responses from the US in terms of our defense budget. Either the US goes one hundred percent in favor of AI, which the big boys (Boeing, Lockheed Martin, Northrop Grumman, etc…) are laughably behind in, or the US sees the bloated expenses the aforementioned are charging the US government and they go with leaner, younger companies while simultaneously expanding their budget. I see no future where the US both has to expand its military spending to counter a warring China and where there is no public and private criticism of the ancient, slow, bloated defense companies.

There are really young, really advanced, really nimble defense startups out there right now. Anduril has already been mentioned on here before for their sick Lord of the Rings name (Anduril is a sword from LOTR. Anduril means “Flame of the West,” which is epic for an American defense company). But in general, there has been this push from Silicon Valley for defense. These really smart people are seeing an opportunity to make money and to revolutionize an industry, something they have always sought out. These startups like Anduril (founded in 2017, worth $14 billion), DeDrone (founded in 2014), Rebellion Defense (founded in 2019, worth $1.5 billion), and so many more are young, hungry, and innovative.

I am telling you that this push into defense from Silicon Valley is real, and AI is the catalyst for the death of the old and the birth of the young. Boeing, Northrop, Lockheed, Raytheon, etc… are behind on AI. If one of these many, many, AI-focused defense companies makes it through, makes it beyond their small, if lucrative government contracts now, they will gobble up market share at a time when military spending is on the rise again.

These AI defense companies are real. They are not imaginary, and they are offering something the US government desperately wants: A completely autonomous military.

The only problem is that because all of these companies are so young, none of them are public yet, so it may be a while, but I am patient.

Keep an eye on Anduril in particular.