Dear Fellow Old Economy Fans,
Military history is filled with oddball moments. Here’s a recent one. A few weeks into the Iran war, on April 10th President Trump sent a Truth Social post, “Palantir Technologies (PLTR) has proven to have great war fighting capabilities and equipment. Just ask our enemies!!!” I tried to think of a precedent – did FDR send a telegram in World War 2 saying, “Grumman Aircraft (GRM) makes awesome planes. Just ask our enemies!!!”? He did not.
Trump’s message highlights the growth of New Defense companies, offering new hardware and software. The best way to understand this new sector is in the context of “Muskism”; a term coined by Ben Tarnoff and Quinn Slobodian in a book published this month analyzing Elon Musk’s political, industrial, and economic beliefs and methods. Musk and SpaceX have been incredibly transformative in space, but there’s only one Musk and one SpaceX. Applied to the new defense tech sector, these Muskist methods might produce very different results. But here are its characteristics:
1. Very strong political support. Like SpaceX, New Defense is greatly outpacing legacy companies in garnering contracts from military and intelligence agencies, police forces, Immigration and Customs Enforcement, and other government agencies. It also enjoys access to government databases, including those with details on US citizens.
New Defense companies also have strong advocates within the government. Peter Thiel and VC firm Andreessen Horowitz are key backers and founders in this sector; Thiel and others have very strong relationships with VP JD Vance and other key administration officials. This helps explain President Trump’s Truth Social message. It also corresponds with one of Eurasia Group’s Top Risks for 2026: State capitalism with American characteristics: “Increasingly, success in M&A bids, regulatory approvals, tariff exemptions, or access to deals requires not just alignment with the agenda but proximity to the president’s inner circle.” Alignment with one political party represents risk, but the VC and PE crowd often has a short-term horizon.
2. “Sovereignty as a service” (per Tarnoff and Slobodian). Political support for the new defense sector also shows up in a willingness to surrender state work to private companies. The state supports these companies; these companies support, or perhaps in some cases supplant, the state. This too represents a form of state capitalism, or perhaps state capture.
First, just as NASA was effectively displaced as the US’s premier space launch provider by SpaceX (again, with very impressive results), Palantir and others would like to perform certain tasks currently performed by the military and government agencies. This includes cueing adversary site targets for air and missile strikes, the mission referenced by Trump in his message. It also includes citizen surveillance and monitoring.
The most obvious questions here are, “Shouldn’t target cueing be done by the US military, and shouldn’t citizen surveillance be done by US government law enforcement and other agencies? Aren’t these basic competencies of the state?” But there are other concerns.
One, assuming there will be a high level of data harvesting involved in this role, what are the long-term economic and practical consequences? Will there a form of subscription pricing involved, with access to this data and associated data processing become increasingly expensive as the private companies grow their roles? And in terms of service quality, what’s to stop what technology theorist Cory Doctorow termed “Enshittification” from applying to monopolistic government technology and data providers? A terrific Wired article makes this risk very clear.
Two, there’s the question of responsibility. If an air strike on targets furnished by a private contractor hits civilians, who bears responsibility? This would be a new technology echo of the controversy over the use of contractors such as Blackwater in Iraq, when their actions resulted in civilian deaths.
3. Vertical integration. Musk’s industrial enterprises rely on vertical integration, something in common with “Fordism.” In contrast with legacy defense primes, the new defense companies want “gigafactories” with a high degree of internal sourcing and less reliance on partners and suppliers. This works well in low-volume industries like space launch. It might work in the EV industry too. But the problems bedeviling weapons and aerospace production ramps can’t be solved with vertical integration, as most supply chain constraints involve inputs that can’t be readily brought in-house: semiconductors, titanium castings and forgings, rare earth elements, etc. And, for legacy defense primes supply chain management is something of a black art, learned over many decades of experience; the new companies might experience this as an unexpected challenge.
4. Aggressive valuations. SpaceX will soon go public in what will likely be the largest IPO ever, with a possible valuation of $2 trillion. Yet annual revenues are below $20 billion, with uncertain profitability. Similarly, Tesla is one of the world’s ten most valuable companies, despite having annual profits of less than $4 billion. The New Defense companies hope to follow this path.
Palantir’s market cap reached $490 billion in November. The Wall Street Journal concluded that no company had reached that valuation so quickly, and with relatively little in sales, although Palantir has actually been around for 23 years (again, recent political tailwinds seem to have helped a lot). In mid-August The Economist said “Palantir might be the most overvalued firm of all time.” Revenue last year was $4.5 billion. By contrast, Lockheed Martin had $75 billion in revenue and now has a $118 billion market cap. Despite mis-steps and flaws, legacy primes have long-term execution track records; new defense companies have very limited records and some big execution mis-steps too.
Palantir’s valuation makes Anduril’s prospective valuation seem reasonable; its annual revenue is just over $2 billion with a reported $60 billion valuation objective, while Shield AI’s cap is around $13 billion, with $300 million in revenue. But Palantir has declined to a $345 billion market cap today. This too might help explain Trump’s inclusion of a stock ticker symbol in his social media post. By many accounts, many of the big new defense company backers have a capital exit plan for the next 18-24 months. Political support might brighten their cashout prospects.
But for now, the new defense companies are largely sustained by VC money. They’re not aiming to maximize profits. They mainly want to create new technologies and products, build new factories, grow their businesses and profile, and, with help from friends in the administration, land more contracts to help them raise more money. Their ability to transition from low oversight VC investment to the scrutiny and oversight (and customer pushback) given to publicly held companies is uncertain.
5. Innovation. The preceding four features are largely negative. But on a positive note, Musk’s two signature creations, SpaceX and Tesla, brought very welcome innovation to what had been conservative industries. They also brought lots of new capital and new industrial methods to these industries. The results were quite positive, even if the outcome for long-term investors is uncertain.
But national defense is very different from the automotive market, or even space launch and satellite communication services. Legacy defense industries are also quite capable of generating new and innovative technologies and products. And while embracing Muskism in the defense industry may bring benefits, there are also uncertainties and dangers, for the US government and foreign governments, investors, and the US military and foreign militaries.
Yours, ‘Til DoD Outsources Nuclear Targeting To Skynet,
Richard Aboulafia