AERG - Applied Energetics
Immense upside in emerging Defense Tech company
Applied Energetics (AERG - $0.79): Investment Summary
Company Background
Applied Energetics, founded in 2003, initially developed a laser solution to neutralize Improvised Explosive Devices (IEDs) in Iraq and Afghanistan. Following early success, the company faced setbacks due to management missteps and legal issues. After years of challenges and a proxy fight, the leadership was overhauled. In 2018, with new management and fresh capital, Applied Energetics shifted its technical focus to Ultra-Short Pulse Laser (USPL) technology, marking a pivotal restart.
Investment Thesis
Directed energy will become more prevalent on the battlefield.
Three main types of directed energy will dominate: continuous wave (CW) lasers, high-power microwave, and ultra-short pulse lasers (USPL).
USPL has the best chance for widespread adoption due largely to its small size, weight and power requirements.
Applied Energetics currently dominates the USPL space for defense.
If AERG executes as expected, it is poised for significant revaluation.
1. Directed Energy Will Become More Prevalent on the Battlefield
As warfare evolves, lasers are becoming pivotal in modern combat due to their ability to neutralize threats with precision and minimal collateral damage. Laser-based Directed Energy Weapons (DEWs) are proving to be game-changers, offering versatile applications such as disabling sensors and destroying enemy equipment at a low cost per shot. Unlike traditional kinetic weapons, which face logistical challenges and imprecision, lasers provide enhanced precision, deep magazines, and reduced infrastructure needs. The U.S. Department of Defense (DOD) increasingly views lasers as critical for addressing emerging threats like drones and guided missiles, making them essential for modern conflict.
2. Three Main Types of Directed Energy Dominate: Continuous Wave Lasers, High Power Microwave, and Ultra-Short Pulse Lasers
Three types of directed energy technologies have emerged as potential disruptors on the battlefield:
Continuous Wave (CW) Lasers: Emit a constant energy beam and are used to melt or burn targets. While effective, CW lasers require sustained targeting, making them less suitable for dynamic combat. They are also bulky, requiring extensive support infrastructure, and leaving them vulnerable to attack.
High Power Microwave: Primarily designed to disrupt electronics and communications over short ranges. While valuable in niche applications, their limited range and scalability restrict broader battlefield use.
Ultra-Short Pulse Lasers (USPL): Generate energy bursts lasting only a trillionth of a second, delivering intense power in each pulse. These lasers offer rapid and precise neutralization of fast-moving threats like drones and missiles.
3. The Modern Battlefield: Saturated with Sensors
Modern warfare is increasingly data-driven, with sensor networks playing a critical role. Drones, satellites, and surveillance systems provide real-time intelligence, guiding missiles, tracking movements, and relaying vital information. Neutralizing these sensors offers a significant strategic advantage, blinding the enemy and disrupting coordination.
USPL technology is particularly well-suited for this. With ultra-short pulses, USPL lasers can neutralize enemy sensors almost instantly. Unlike Continuous Wave (CW) lasers, which require sustained focus, USPL delivers rapid, high-energy bursts, making it highly effective against fast-moving, sensor-equipped platforms like drone swarms. As sensor-driven combat expands, USPL will become a critical tool in modern warfare.
4. USPL, and Applied Energetics Specifically, Has the Best Chance for Widespread Adoption
Because of its low SWaP (size, weight and power) footprint, Applied Energetics has emerged as the defense industry leader in USPL technology. Their compact, ruggedized, lightweight design—under 100 lbs and approximately 1 cubic foot—makes them ideal for deployment on small vehicles, aircraft, and even as portable backpack units.
To date, the Department of Defense (DOD) has awarded three USPL contracts for defense applications, and AERG has secured all three. Furthermore, AERG is often the sole attendee at military-led USPL workshops aimed at fostering collaboration between the DOD and private companies, highlighting its dominance in this niche of defense laser technology.
During a recent visit, DOD experts in USPLs were visibly surprised at AERG’s current progress versus their expectations.
5. AERG is Gaining Traction Towards an Inflection Point
AERG is approaching a pivotal inflection point. Management has confirmed that they are having more active discussions with defense primes, integrators, and potential partners than at any point in the company’s history, reflecting the growing interest in its technology. Two potential partners have even offered to receive equity instead of cash, signaling their strong confidence in the technology’s prospects.
Additionally, management says that its pipeline of new business opportunities is also more robust than it has ever been, with around a dozen NDAs signed with prospective partners. These partnerships aim to assist with critical development such as object tracking and aiming technologies, and productization—key steps for bringing AERG’s USPL systems to market.
AERG is also nearing completion of its Arizona Battle Lab, where it will transition from lab-based demonstrations to simulated battle environments with live aircraft. This milestone will be instrumental in convincingly demonstrating real product-market fit, solidifying AERG's standing in the defense sector and accelerating its path toward commercialization.
6. Market Size Potential:
Applied Energetics has secured three active military contracts with the Army, Navy, and Marines. One contract could potentially lead to deployment on a platform involving 15,000 Joint Light Tactical Vehicles (JLTVs). At an estimated price of $1 million to $2 million per laser, even a 20% market penetration would represent a $3 billion opportunity at the lower price point.
Another contract could result in deployment on an airborne platform involving 5,500 aircraft. With the same 20% penetration rate and the higher-end price point, this could add an additional $2 billion in potential revenue. These figures do not account for further opportunities in fixed installations, backpack units, or space applications, making the total addressable market (TAM) particularly compelling.
7. Independent Verification of AERG’s Technology
My independent research confirms much of what AERG’s management has claimed. Conversations with scientists at top university labs affirm that the specs of AERG’s USPL technology ranks among the top-performing lasers in the industry. A top laser expert at a leading defense integrator familiar with AERG's technology expressed that he is highly impressed with their advancements. Once he fully understood its capabilities, he mentioned that the potential for space-based defense applications could be ten times greater than terrestrial ones, though he couldn’t provide further details due to the classified nature of the work.
Further corroboration comes from industry papers and expert conversations, particularly in the area of sensor disruption. The specifications AERG has disclosed align closely with top-tier performance standards, supporting their claims of having a uniquely capable product in the market.
8. A Comment on Management
The leadership team at Applied Energetics is composed of seasoned professionals with extensive experience in both technology and defense:
Dr. Stephen McCahon: Lead developer and a recognized leader in laser research and development, with over 40 patents to his name.
Chris Donaghey: COO, previously led business development for SAIC and was a top-ranked Wall Street analyst in defense technology.
Greg Quarles: CEO, both a laser scientist and an executive with decades of experience in optics and defense.
Jim Harrison: Has a long track record in scaling and productizing optical systems, well-positioned to lead AERG’s technology to commercialization.
Patrick Williams: With extensive experience in DOD and government sector sales, Williams has a strong history of securing contracts and navigating the defense acquisition process.
Supporting this leadership team is a group of 12 optical physicists, technicians, and engineers, underscoring the company’s depth of technical expertise.
9. Financial Condition and the "Valley of Death"
AERG is in a critical period with only a few million dollars in the bank and a monthly burn rate of several hundred thousand dollars. Despite these financial constraints, management chose not to raise additional capital, particularly at current stock levels, citing strong confidence in multiple contracts closing by year-end. Press releases for these potential announcements have already been prepared, pending final contract approvals.
Chris Donaghey, COO of AERG, emphasizes that the company is well-positioned to weather the typical “valley of death” that often plagues startups in this sector. His extensive experience, including his role as co-founder of the Silicon Valley Defense Group—which bridges the gap between Silicon Valley and defense tech startups—makes him acutely aware of the risks and challenges involved. Donaghey's firm decision to hold off on raising additional funds at this time indicates a high level of confidence in AERG’s near-term future and contract pipeline.
10. Financial and Valuation Overview
The company is currently performing on three contracts, generating a couple hundred thousand dollars per month, with these contracts extending through 2025. Though the company continues to burn cash, any new contract win could shift the company from loss to profitability. Management has made it clear they do not intend to slow their investment. They are aiming for a strategic raise of $20 to $40 million by mid-2025 to rapidly accelerate the productization of their laser technology.
The market cap is $180 million, relatively high for a company with minimal revenue, but significantly undervalued given its cutting-edge technology and dominant position in an area with multi-billion-dollar revenue potential. The company’s public structure seems somewhat misaligned, as stock price movements often don’t reflect operational milestones. With most shares held by management and long-term supporters, the limited float contributes to volatility and limited liquidity. Additionally, there is notable short interest in the stock, likely driven by strategic short sellers unaware of the company's underlying narrative and growth potential.
11. Comparable Valuations
When valuing Applied Energetics, it is useful to compare them to defense tech companies with similar profiles as well as companies that represent what Applied Energetics could soon resemble.
Epirus, Inc.: Valued at $1.15 billion (March 2022) after raising $287.6 million in total funding. They received a $66.1 million contract from the U.S. Army in January 2023.
Saronic Technologies: Valued at $1 billion (July 2024), having raised $245 million in total funding. The company secured $2 million in government contracts through July 2024.
Anduril Industries: A major player in defense tech, known for integrating advanced technologies into defense systems. Its valuation surged to $8.5 billion (2022) after multiple successful contract wins and high-profile partnerships with the U.S. government.
BlueHalo: Another prominent defense tech company, valued at over $3 billion (2023). They are involved in directed energy weapons, much like Applied Energetics, and have received several DOD contracts.
These comparisons underscore the potential for significant valuation growth in defense tech companies that secure government contracts and develop proprietary technologies. Applied Energetics’ dominance in the USPL space, combined with its low SWaP advantages, positions the company for a substantial revaluation if they successfully execute on their current contracts and opportunities.
12. Potential Near-Term Stock Catalysts
· New Pursuits: Existing contracts could evolve into more substantial engagements, and new DOD pursuits would solidify leadership status and enhance financial outlook.
· Technological Milestones: Successful demonstrations at the Arizona Battle Lab could boost potential partner and customer confidence and accelerate product development.
· Strategic Partnerships: New alliances would further bolster financial outlook and reinforce industry standing.
· Capital Raise: New capital would accelerate product development and significantly lower the risk of financial distress.
· Pressure on Short Sellers: We estimate that there could be as many as 40 million shares short. Positive company developments could lead to a meaningful squeeze.
13. Conclusion: Why I Own It
My independent research confirms that the defense opportunity for ultra-short pulse lasers (USPL) is immense, with Applied Energetics at the forefront. The company’s three active military contracts alone hold the potential to evolve into billions in revenue.
As the clear leader in a rapidly growing sector, Applied Energetics is positioned for explosive growth. Multiple contracts are near closing, and interest is set to intensify as the company demonstrates undeniable product-market fit at its new Battle Lab.
If my thesis plays out as expected, and all of my research suggests it will, a $3 billion valuation or a $14 share price is entirely achievable.