Small Contractors Set to Benefit from Strategic Alliances and Government Efforts in 2025

Small defense contractors could benefit from the incoming Administration’s cost approach, some firms in the sector believe. That’s because the initiatives may spur more alliances between large defense companies and more diminutive ones.

And Because of the incoming administration’s government-efficiency commission, small defense companies are likely to get a bigger percentage of defense spending, a number of defense contractors asserted recently. They base their hypothesis on the fact that Elon Musk has a 42% stake in SpaceX, which is a relatively small Pentagon contractor.

Also importantly, the current administration has taken multiple steps to try to make it easier for small defense contractors to compete with their  larger peers. Specifically, it has streamlined the application process for projects, looked to ensure that bidding is “fair and accessible to all stakeholders,” and sought to work more extensively with small contractors. Some or all of these efforts may well continue into the next administration.

One small Pentagon contractor that investors may want to keep an eye on is AST Spacemobile (ASTS). In October, the firm obtained the right from the Defense Department’s Space Development Agency to compete “for upcoming prototype demonstration projects.” Specifically, the company will be able to offer the Pentagon “advanced space technologies.” AST is developing “the first and only space-based cellular broadband network accessible directly by everyday smartphones.”

Among its strategic partners are Verizon (VZ), AT&T (T), and European telecom giant Vodafone (VOD). After launching five of its satellites in September, AST is seeking the FCC’s permission to test its  cellular connectivity services on the networks owned by Verizon and AT&T.

And on December 9, AST announced that it had signed a deal with Vodafone that will last through 2034. According to AST, the agreement will enable the European telecom consortium “ to offer space-based cellular broadband connectivity in its home markets, as well as to other operators “

AST SpaceMobile generated just $2.5 million of revenue in the first three quarters of the year, and its market capitalization is $6.75 billion.

Archer Aviation (ACHR) is developing electric vertical takeoff and landing (eVTOL) aircraft. It hopes that, by the end of next year, its eVTOLs will be used as air taxis which will enable passengers to avoid the massive traffic that’s often present in crowded cities.

The company recently agreed to sell 100 of its eVTOLS to a Japanese company that will use them as air taxis, and Archer itself plans to establish air taxi service in Abu Dhabi as soon as next year.

Archer also recently announced a deal to partner with defense contractor Anduril Industries in order to create a “ hybrid-power vertical takeoff and landing aircraft” for the Defense Department.  And in July 2023, Archer signed an agreement worth as much as $142 million with the Air Force. Under the deal, Archer was slated to provide the Air Force with six eVTOLs and a great deal of data. The company also agreed to train the Air Force’s pilots and to establish “maintenance and repair operations” for the service.

As of the end of Q3, Archer had not yet generated any revenue. Its market capitalization is $3.7 billion.