In this exclusive article, Igor Pejic, author of the new book Tech Money, assesses the shift from industrial-age warfare to software-driven conflict, explaining why now might be the time to rethink defense investing.
The war with Iran has entered the next round. As U.S. Tomahawk and Patriot stockpiles run critically low after heavy bombing, President Trump is rallying defense giants and Wall Street titans at a high-profile Pennsylvania summit. The composition of the attendees speaks volumes. About the trouble of legacy defense contractors in times of war. About the administration’s approach to fix it. And about the implications for investors.
It will take American manufacturers a minimum of three years to replenish the depleted stockpiles. This means that the pipelines for the likes of Lockheed Martin and Boeing are filled for years to come. And given that defense is a highly specialized industry critical to national security, in theory this should lead them to a strong negotiating position on pricing.
As a result, their share prices should be skyrocketing with every missile that is fired. Yet Lockheed Martin is down by 22% since the outbreak of the Iran war. Northrop Grumman dropped by 29%, L3Harris by 23%. Similar observations in times of war have been made repeatedly throughout history. After Japanese bombs fell on Pearl Harbor, American weapon manufacturers performed significantly worse than before.
This phenomenon has been dubbed the defense stock paradox. The paradox exists because of a scale mismatch of demand and supply in traditional wartime economics. What the battlefield consumes is higher by magnitudes than what contractors can deliver. Even things like munition that are comparably simple to manufacture, suffer from it as the machinery, material, and the staff needed to churn them out can’t be added overnight. Fragile, increasingly interdependent international supply chains exacerbate the problem.
Let’s return to the Pennsylvania defense summit. The attendees included the CEOs and CTOs of banking behemoths like JPMorgan and Blackstone and those of legacy defense players such as Lockheed Martin, General Dynamics and Boeing. Yet the summit also featured executives of dual-nature defense tech companies, most notably Palantir and SpaceX.
Why is that noteworthy? Because the new breed of tech companies seems to have solved the defense stock paradox. Like in almost every other industry, tech behemoths have not only become major players, but they have re-written the rules of the game. Unlike producers of jets and tanks, software companies can scale effortlessly. SpaceX can instantly grant access to a communication network from space that is very hard to disrupt.
Whether 1,000 or one million drones use Palantir’s Ontology software, makes no difference. On the contrary: They feed the algorithms with more data, which makes them more accurate and more powerful. Hence, their stock prices have not gone down as a result of the war with Iran.
The administration seems to believe these tech players cannot only escape the paradox, but also help alleviate it for traditional defense contractors. It will take a hybrid approach to fix the industrial base problem. Palantir and SpaceX are expected to use their AI capabilities to help streamline the supply chains.
For example, predictive analytics and digital twins can speed up production lines and predict part shortages. This collaboration could indeed prove to be fruitful and it might even lift the stock price of traditional contractors in the long run. The bigger winners, however, will be the tech companies. Legacy contractors will pay for their services either way. If they are successful, they will pay even more.
The presence of finance elite like Jamie Dimon and Jon Gray at the summit signals another, somewhat unexpected conviction of the Trump administration. For a Republican, the President has been surprisingly comfortable with nationalizing private companies. The best example is when the government converted outstanding grants it had given to Intel into an equity stake, making it the largest shareholder.
Intel’s price has been surging since then, at least for now. Shareholders of legacy defense contractors hoping for something similar, were so far disappointed. Despite the $1.5 trillion defense budget proposal, the guest list of the summit makes it clear that the administration sees a more active role of private capital in rebuilding the American defense capabilities. The government does not seek to be involved directly. This implies that industrial defense players are treated as an important pillar, but not as a decisive one. That role falls to technology players.
As the hardware-centric, industrial-age war paradigm yields to a software-centric one, a strong opportunity presents itself to investors. War is still unpredictable and for most defense products the first real test occurs in war itself. Some technologies will falter on the battlefields, as will the companies behind them.
But as a category, this new generation of defense tech will be less impacted by geopolitics than the previous one. Moreover, governments ascribe more value to them. Tech defense firms simply succeed in many more scenarios than legacy defense companies.
Igor Pejic, author Tech Money
Igor Pejic is an award-winning author, keynote speaker, and banker. His latest book Tech Money uncovers the new rules of investing in the technology age and teaches investors and executives how to benefit from them. His previous titles include Blockchain Babel that won the Independent Press Award and was a finalist in the Bracken Bower Prizes (awarded by the Financial Times and McKinsey). Pejic publishes the esteemed industry newsletter The New Frontier, and his articles and interviews regularly appear in media such as the New York Times, the American Banker, or Bloomberg. Pejic has held different management positions in banking and payments, currently at one of the largest banking groups in Europe.
