Update: Applied Energetics (AERG)
A Transformative Opportunity in Defense Technology
In prior memos, I discussed Applied Energetics’ (AERG) leadership in ultra-short pulse laser (USPL) technology and its transformative potential in defense (article 1) and (article 2). A recent milestone has further solidified this thesis: AERG’s Memorandum of Understanding (MOU) with Kord Technologies, a leader in continuous wave (CW) laser systems.
This partnership positions AERG’s USPL technology as an essential complement to Kord’s proven CW systems, creating dual-use solutions with unparalleled precision and adaptability. The collaboration validates AERG’s strategic importance and accelerates its relevance in addressing today’s evolving battlefield threats.
Below is an updated analysis.
The Battlefield Has Changed
The battlefield has permanently shifted from a focus on heavy, centralized assets to a dispersed, technology-driven domain increasingly defined by drones, hypersonic missiles, and sensor-saturated networks, where agility and real-time data are critical to success.
This transformation has created three critical needs for modern militaries, and companies that deliver meaningful solutions in even one of these areas will unlock billions in investor value:
Gathering and Processing of Intelligence: Palantir leads in revolutionizing how militaries process and act on real-time data, commanding a $172 billion valuation.
Innovative Striking Capabilities: Anduril is one of several companies that has introduced cutting-edge drones and next-generation missiles, earning a $14 billion valuation.
Defense Against Evolving Threats: Here lies the opportunity. Defense primes and integrators are spending billions, and various startups are racing for relevance, but the legacy technologies they have committed to are not quite fit for purpose.
I believe Applied Energetics (AERG) is the definitive category killer in defense against hypersonic missiles, drones, and sensor-driven threats.
Ultra-short pulse laser (USPL) technology represents a paradigm shift in battlefield defense. Applied Energetics not only has a massive lead but is the only serious player in this space. Their revolutionary USPL technology directly addresses these critical challenges with unmatched precision and adaptability. With its low Size, Weight, and Power (SWaP) requirements, USPL marks a transformative evolution in directed energy weapons.
Ongoing DoD contracts highlight their progress and strategic importance:
Marine Corps: Counter-ISR capabilities (neutralizing drones).
Army: Infrared countermeasures.
Navy: Ship self-protection.
These contracts could soon expand in scope, further solidifying AERG’s relevance. As the only serious player advancing this transformative technology, AERG is positioned to become an indispensable asset in the defense landscape.
Product-Market Fit
Recent developments have further reinforced Applied Energetics’ (AERG) relevance in defense technology. The company’s newly announced collaboration with Kord Technologies—a leader in continuous wave (CW) laser systems—represents a pivotal step forward. This collaboration demonstrates how AERG’s ultra-short pulse laser (USPL) technology integrates seamlessly into existing platforms, enhancing their functionality and utility.
Kord, already a proven innovator with a commercialized CW laser, is now marketing a Dual-Use Laser system that combines CW and USPL capabilities. This combination addresses multiple operational needs: USPL disables a drone’s sensors with precision and a sub-second engagement time (applicable to swarm situations in particular), while CW eliminates the threat entirely although its multi-second engagement time leaves it more vulnerable to swarm scenarios.
Consider the implications: If Kord competes against a company like Raytheon for an Army contract, and cost and performance are comparable, Kord’s added USPL functionality becomes a decisive factor. This partnership sets a new standard for directed energy systems—platforms without USPL capabilities may increasingly be viewed as incomplete.
The Kord partnership underscores the increasing applicability of AERG’s USPL technology. As defense priorities shift to demand more adaptable and multi-functional systems, collaborations like this highlight the growing necessity of AERG’s contribution to next-generation solutions.
Why the Mispricing Exists
Public But It Shouldn’t Be
If AERG were a private company, it would likely resemble Epirus, which raised $200 million in 2022 at a $1.4 billion valuation for its microwave technology. While Epirus may be 6–9 months ahead of AERG in development, its technology is, in my view, significantly less effective with far less potential.
As it stands, AERG occupies a kind of purgatory—unable to access venture capital due to its public status, yet not listed on a major exchange, which limits participation from institutional investors. This structural misalignment has left AERG retail-investor heavy and meaningfully undervalued compared to private-sector peers, despite its vastly superior potential.
Short-Selling Exploitation
I estimate roughly 40 million shares are short, mostly driven by institutional players. Their playbook is straightforward (and unsophisticated): target a small-cap company with limited revenue, a weak balance sheet, and a small market cap.
This strategy relies heavily on naked shorting loopholes and other structural flaws in the market to create artificial downward pressure on the stock price. But with just 100,000 shares traded daily on average, it’s not difficult to imagine the disarray that could ensue as shorts scramble to cover when AERG’s strategic importance becomes apparent. I envision at least one pod at Citadel (or its equivalent) being forced into liquidation in 2025.
Behemoth Inertia
Major defense contractors continue to dominate the industry, relying on legacy technologies like continuous wave lasers and microwave systems. Despite mounting evidence of their inadequacy against modern threats, these companies remain committed to their existing investments.
This institutional inertia has sucked all of the air from the room and kept USPL technology a relative secret, even as the demand for a viable alternative grows increasingly urgent.
Space-Based Opportunity
The space-based applications for USPL represent an entirely separate but even more compelling long-term opportunity. Directed energy weapons are uniquely suited for orbital defense, addressing critical needs such as neutralizing anti-satellite weapons, protecting vital infrastructure, and even managing orbital debris.
Space-based systems face strict limitations on size, weight, and power (SWaP) - constraints that AERG’s USPL technology is uniquely positioned to overcome. With its low SWaP characteristics, AERG provides a significant advantage for compact, efficient systems designed for orbital deployment.
A leading HEL scientist has estimated that the opportunity for AERG’s USPL in space is 10x greater than terrestrial applications. This is not surprising, given the increasing militarization of space and the vulnerabilities exposed by recent advances in anti-satellite weaponry. When I asked AERG management about the potential for space-based defense, their response was telling: “That’s classified. We can’t talk about it.”
While still developing, the growing recognition of space-based defense needs positions AERG as a likely leader in this domain. As the company solidifies its terrestrial applications, its low SWaP USPL technology is poised to redefine what is possible in orbital defense.
Acknowledging Risks
Despite my conviction, AERG is an early-stage investment. The key challenges include:
Funding: AERG’s balance sheet is weak, necessitating additional funding to scale operations. I expect this to be resolved soon.
Execution: Upcoming field tests must deliver as expected to validate the technology to prospective customers and investors.
Competition: While AERG has a lead, competing USPL (or other) technologies could emerge.
Adoption Delays: Government procurement cycles can be slow, potentially delaying large-scale adoption.
These risks are mitigated by the urgency of the threats AERG addresses, the DoD’s growing investment in USPL technology, and AERG’s heavily patent-protected innovations.
The ChatGPT Exercise
While not a formal part of my due diligence, I recently conducted an exercise with ChatGPT to identify broad defense technology opportunities. The results aligned remarkably well with my research, underscoring AERG's strategic positioning. I asked:
"What are the top 10 most compelling military use cases for a startup?"
ChatGPT identified these areas:
Counter-UAS (Unmanned Aerial Systems)
Directed-Energy Weapons (DEWs)
AI-Driven ISR (Intelligence, Surveillance, Reconnaissance)
Secure Communications
Portable Power Solutions
Hypersonic Defense
Autonomous Logistics
Wearable Soldier Tech
Space-Based Defense
Advanced Training Simulators
Interestingly, half of these needs fall directly in AERG’s wheelhouse:
Counter-UAS: Neutralizes drones with pinpoint precision and minimal collateral damage.
Directed-Energy Weapons: AERG’s core offering.
Hypersonic Defense: USPL provides effective novel remedies for hypersonic threats.
Space-Based Defense: Potential in space is estimated to be 10x greater than terrestrial use.
Photonics: AE sees long-term potential for miniaturization to a chip.
I then asked,
“What existing or potential technology best satisfies all of these military needs?”
It mentioned quantum technologies and AI for ISR (intelligence, surveillance and reconnaissance), but gave USPL the edge because the technology is real and ready today.
Valuation Potential
Applied Energetics stands at the intersection of critical defense needs and transformative technology, uniquely positioned to dominate the category of defense against evolving threats. Its USPL system offers revolutionary capabilities in countering drones, defending against hypersonic missiles, and addressing sensor-driven threats—areas where I believe competitors like Epirus ($1.4 billion valuation) fall short.
While AERG's potential valuation is speculative at this stage, the breadth of its applications and category-defining technology suggest parallels with successful defense technology companies. As the company validates its technology through field tests, secures additional contracts, and expands its partnerships, its valuation could easily align with Epirus ($1.4 billion) or even Anduril ($14 billion) over time.
Moreover, as a potential category killer, AERG could achieve valuations directionally closer to the dominant force in intelligence gathering and processing—Palantir ($172 billion). This isn’t entirely far-fetched given the breadth of its USPL applications across land, air, and space—the latter offering long-term growth on an entirely new scale.
Catalysts
Several near-term catalysts could significantly reprice AERG’s shares:
Successful Field Tests: Results from the Battle Lab in 1Q and field tests in the summer will validate USPL’s real-world effectiveness.
Partnership Announcements: New collaborations with defense primes or integrators will further emphasize USPL’s strategic importance.
DoD Contract Expansions: Additions to contracts with the Army, Navy, and Marines will demonstrate increasing confidence in AERG’s technology.
Major Government Contracts: New funding awards will confirm the urgency of USPL.
Uplisting to Nasdaq: Planned for 1H25, this will expand institutional access and visibility.
Significant Funding Rounds: Additional capital will de-risk operations.
Shift in Investor Base: Transition from retail-heavy ownership to institutional investors.
Rising Space-Based Awareness: As awareness of space-based opportunities grows, AERG’s low SWaP USPL technology will be recognized as indispensable.
Short Squeeze: A retreat by shorts could create substantial upward momentum.
Conclusion
I believe Applied Energetics represents a generational opportunity in defense technology. Its revolutionary USPL system is solving mission-critical challenges that current defense technologies cannot address.
The combination of macro trends, strong intellectual property, and a clear edge in directed energy weapons makes AERG one of the most compelling early-stage investments I have ever encountered.