Elbit and Next Vision learned the hard way: the rules of the game for defense stocks have changed

This week, the two largest defense companies on the Tel Aviv Stock Exchange published their results for the second quarter. The reports looked like every investor's dream, with a surge in the order backlog, profits, and revenue. And yet, both were punished on the day the reports were published, and their shares fell sharply. The market explains that it was not the results that disappointed investors, but a new bar set for one of the sectors considered the hottest in Tel Aviv.

On Tuesday, Elbit Systems, Israel's largest defense company managed by Bezalel (Butzi) Machlis, concluded the second quarter with a record order backlog of $32 billion, compared to $28 billion at the end of 2025. Revenue totaled $2.3 billion, an increase of 16% compared to the same period, and net profit (Non-GAAP) jumped by 32% to $199 million.

Both lines beat the consensus on Wall Street, and yet the stock plunged on the Tel Aviv Stock Exchange and at the opening of trading in the US. By noon, this decline stood at 8%, representing a loss of 10 billion shekels in market value in a single trading day.

This is the second such case in two days. On Monday, the manufacturer of stabilized cameras for drones, Next Vision, led by Chen Golan, reported revenue of $88.2 million in the second quarter, a growth of 138%, and a net profit of $53.6 million, an increase of 130%. The company even raised its annual revenue forecast for the second time this year to $355 million, reflecting growth of about 111% in 2026. Investors sent the stock down 6.7% on Monday, followed by a tiny recovery on Tuesday.

Twice as expensive as the industry average

How is it possible that even results that beat analysts' forecasts and triple-digit growth are met with disappointment? Elbit has completed a 240% jump in the last three years, Next Vision over 1,050%. Both are the largest stocks in the TA Defense index, with Elbit trading at a valuation of 111 billion shekels and Next Vision at 20.3 billion shekels.

Rami Dror, CEO of Value Advanced Investments, explains: "The sharp declines are not due to weak reports, but to the high bar of expectations built around defense stocks. The market requires not only good results but a forecast that reflects continued business acceleration." Ilya Fainer, an analyst at Leader Capital Markets, noted that investors used the reports to take profits after a 60% rise over the last year.

David Levinson, a stock analyst at Bank Hapoalim, added that the gap between results and expectations is the main explanation for the decline. Investors focused on the increase in the effective tax rate and heavy investments in R&D. Hapoalim continues to cover Elbit with a "market perform" rating, assuming most growth engines are already priced in.

The main explanation is valuation. Elbit trades at a P/E multiple of 63, and Next Vision at 55. This is double the average multiple in the TA Defense index (33). Since the peak in March, the index has lost 36% of its value.

Weaknesses

In both cases, experts point to specific nuances. For Elbit, these include a decline in the aviation sector and operational disruptions. For Next Vision, the market noted a drop in gross margin to about 65% (compared to 72% last year) and a decrease of over $20 million in the order backlog compared to the first quarter. Kobi Segev, managing partner at Accord, explained that the backlog decreases in the second quarter every year and that the current price is close to the company's economic equilibrium value.