2 AI Defense Stocks Soar 30%+ in 2025, Poised for More in 2026

Palantir reported Q3 revenue of $1.18 billion, up 63% year-over-year and 18% sequentially, with U.S. commercial revenue of $397M (+121% YoY) and government revenue of $486M (+52% YoY); the company raised Q4 revenue guidance to $1.327–1.331B and full-year to $4.396–4.400B while forecasting positive GAAP operating and net income and ~42.5% expected earnings growth next year. BigBear.ai posted Q3 revenue of $33.1M (down 20% YoY) but agreed to acquire Ask Sage for $250M, raised full-year revenue guidance to $125–140M and reported a cash balance of $456.6M, underpinning a projected ~73.1% earnings growth next year. Both stocks carry a Zacks Rank #2, presenting a bullish, AI- and defense-focused trade thesis with differentiated risk profiles (established Palantir vs. speculative BigBear.ai) for investors allocating to AI/defense exposure.

Analysis

Market structure: Palantir (PLTR) and BigBear.ai (BBAI) are direct beneficiaries of rising AI demand in defense and commercial analytics; incumbents with legacy analytics tech and niche VARs risk losing share as platform-based AIP/Ask Sage offerings scale. Sticky government contracts (multi-year, high renewal rates) give PLTR sustained pricing power; small-cap suppliers face lumpier, demand-driven revenue streams, concentrating downside risk in BBAI-like names. Cross-asset: larger defense capex expectations should modestly steepen the yield curve (10–50bp over 6–12 months) and lift USD via safe-haven corporate demand; expect elevated equity implied vol in small-cap AI names for 30–90 days post-guidance/earnings.

Risk assessment: Tail risks include DoD budget cuts or contract cancellations (>5% hit to expected FY revenue), US/EU AI export controls, and failed M&A integration at BBAI (Ask Sage). Near-term (days-weeks) price spikes tied to headlines; medium-term (1–4 quarters) guidance misses or delivery slippage; long-term (2+ years) dependent on commercial monetization of AIP and persistent government spend. Hidden dependency: Palantir’s commercial growth is sensitive to enterprise adoption cycles and contract cadence; BigBear’s upside is M&A-dependent and cash-intensive.

Trade implications: Tactical: favor quality large-cap exposure (PLTR) and keep small-cap BBAI as a capped-convexity punt. Use directional equity exposure sized to risk (PLTR 2–4% NAV, BBAI 0.5–1.5% NAV) and express through time-limited option structures (6–12 month call spreads/LEAPs). Pair trades: long PLTR vs short a 50–100bps-weighted basket of small-cap AI-defense names to isolate idiosyncratic risk. Use short-dated call spreads to harvest IV and 6–12 week put spreads to buy dips of ~10–15%.

Contrarian angles: Consensus overlooks multiple-compression risk in PLTR—42% EPS growth priced into rich multiples; a 10–20% multiple contraction could erase gains despite revenue beats. Conversely, BBAI’s cash hoard ($456m) and Ask Sage IP could be underappreciated if integration executes—binary upside but high downside if FY26 revenues miss the newly raised $125–140m guide. Historical parallel: 2015–2016 defense tech IPO/boom shows rapid rerating when procurement priorities shift; position sizing must reflect asymmetric payoffs.

Key Decisions for Investors

• Establish a tactical long in PLTR equal to 3% of NAV via a 6-month call spread (buy ATM, sell strike ~+30% OTM). Set an 18% hard stop on mark-to-market losses; trim 50% at +40% and close remainder at +80% or after two consecutive beat-and-raise quarters.
• Initiate a speculative 1% NAV position in BBAI only after Ask Sage transaction terms clear (expected within 30–90 days): either equity or 12-month OTM calls (50% OTM). Hard stop: cut at -30% on revenue-guidance miss; take-profit: +100% if FY26 revenue reaches midpoint ($132.5m).
• Implement a relative-value pair: go long PLTR (3% NAV) and short a small-cap AI-defense basket (total −2% NAV, weighted across 4–6 names) to hedge sector beta; rebalance after each quarterly print or if DoD budget variance >±5% vs baseline within 90 days.
• Use options to monetize elevated IV: sell 30–45 day call spreads on PLTR for premium capture while maintaining directional exposure; concurrently sell 6–12 week 10–15% OTM put spreads to accumulate shares on a 10–15% downside move. Monitor DoD budget votes and quarterly guidance updates within 60–90 days to reprice risk.