A.I. is changing national security systems. Here’s what’s ahead for defense stocks

Vladimir Putin said in 2017 that whoever becomes the leader in artificial intelligence “will be the ruler of the world.” Nearly six years later, the defense industry is developing more AI applications that are shaping the way geopolitical conflicts are fought — but the debate around its ethics are intensifying. Through almost every aspect of national security, including on-the-ground battles and cybersecurity, AI applications are being developed to assist decision-making and analytics. Indeed, the Pentagon allotted $1.8 billion toward AI spending in its fiscal year 2024 budget. The number of AI and machine-learning patents in defense has skyrocketed from less than 1,000 in 2015 to nearly 4,000 in 2022, according to a recent note from Deutsche Bank in June. The Department of Defense began thinking about AI technology “in a very deliberate way” in 2014, according to Bob Work, a distinguished senior fellow for defense and national security at the Center for a New American Security and former U.S. Deputy Secretary of Defense. The department examined AI technology in defense through two pathways: The first was “autonomy at rest,” which describes decision-making support software. The second pathway was “autonomy in motion” or AI-supported systems that control unmanned vehicles, Work explained. Critically, artificial intelligence in defense will help automate more dangerous tasks while also reducing the risk of human casualties. “There are AI optimists, [and] those who are AI pessimists. There’s a big debate going on now between the two schools of thought. And it all revolves around responsible AI, getting rid of biases [and] having AI operate responsibly, reliably and accurately,” said Work. AI defense technologies The development of AI technology in the defense sector will be largely playing out around the use of data, according to Jonathan Sakraida, CFRA Research analyst and U.S. Army veteran. He named automated target recognition capabilities — or more broadly, sensors — as one of the key areas in which companies such as Lockheed Martin and General Dynamics are developing. This technology essentially functions as “eyes” on the battlefield to identify targets. “The future of the battlefield isn’t who has larger munitions or the larger gun. It’s about who sees who first, and a lot of that has to do with the advancement of each army’s sensor technology. And artificial intelligence is going to help with that, as far as automatically identifying relevant targets,” said Sakraida. AI is also being used to compile and analyze data to simplify on-the-ground analysis and supplement decision making. Computer vision can scan and rapidly pick out objects in pictures, which analysts can use to predict and fix potential issues before they arise. A 2018 study showed that using statistical data, AI could be used to forecast and limit armed conflicts . Sakraida and Work were both keen to underscore AI’s role as a supplementary tool, as opposed to a substitute for human decision-making. Using artificial intelligence to actually make battlefield decisions still remains a “regulatory gray area,” Sakraida noted. “As of now, there is not the development of artificial intelligence technology in regards to making life-or-death choices. It [is] just meant as a capability multiplier, supplementary tool,” said Sakraida. Work also emphasized that the Department of Defense’s policy is that in the case of potential lethal force, the situation can only be controlled by human judgment, not by a machine. “The Department of Defense doesn’t make any bones that these machines sometimes will make mistakes. But generally, they make fewer mistakes than humans do,” said Work. Beyond battlefields, more than 75 countries — including the U.S. and China — are using AI technology for surveillance. According to a 2019 paper from the Carnegie Endowment for International Peace, key U.S. companies supplying this technology are IBM , Palantir Technologies and Cisco . To be sure, the organization noted that even liberal democracies “are not taking adequate steps to monitor and control the spread of sophisticated technologies linked to a range of violations.” Growing demand Cyber warfare is one area of defense where demand for AI is notably increasing. The ability of automatic systems to quickly block and fight cyber attacks has already put AI in the decision-making seat, according to Work. “Humans can’t keep up with cyber attacks at machine speeds. They just can’t do it. The machine will go faster than humans, [and] break through and inject cyber malware,” Work said. Deutsche Bank predicts cyber defense is becoming increasingly essential as major cyberattacks gain in frequency. United Kingdom-based BAE Systems, which trades through American depositary receipts in the U.S., has received a contract from the Defense Advanced Research Projects Agency. The company provides cybersecurity services and electronic warfare systems. Northrop Grumman , Booz Allen Hamilton and Palantir have also emerged as leading defense companies advancing AI applications in cybersecurity. Some of the biggest defense names have already begun investing in AI to create unmanned aerial vehicles and underwater vehicles. Boeing announced earlier in 2023 that it would partner with defense technology company Shield AI to expand AI pilot offerings for its military clients. Whether investors should currently invest in defense stocks anticipating a potential tailwind from AI is less certain, according to Sakraida. The aerospace and defense industry is down 1.4% year to date, while the S & P 500 is up 19%. Sakraida said this could largely be attributable to declining margins stemming from the fixed-price nature of most defense contracts — not ideal during a high-inflation environment. The subsequent erosion in margin quality “has resulted in stock prices not really following higher defense budgets as of yet,” he said. Implementation of AI in defense remains limited, the analyst noted, with the technology in an “experimental phase.” Nonetheless, he notes that the U.S.’ move toward modernization has provided a catalyst for investment in artificial intelligence. “So near-peer adversaries, they have a lot of the same technology: They have tanks, they have night vision goggles, they have an Air Force. So we always want to be one step ahead. So this is now a catalyst for investment in something like artificial intelligence,” said Sakraida. “The future of the battlefield is the use of artificial intelligence,” he added.

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