Rheinmetall Flies a Drone Deal, but the Market Isn’t Ready to Lift Off

Rheinmetall signs MoU for Victor U250 heavy-lift drone production, but shares trade 40% below highs as Morgan Stanley downgrades European defence, citing ceasefire risks and fading momentum.

The Düsseldorf defence group signed a memorandum of understanding on Wednesday with drone developer ERC System and the state of North Rhine-Westphalia, aiming to set up a production site for the Victor U250 heavy-lift drone. The unmanned VTOL system—capable of vertical take-off and landing—carries a payload of 250 kilograms over 300 kilometres, positioning it as a potential logistics backbone for military operations in tough terrain. ERC System plans to complete a first prototype later this year, with serial production potentially beginning as early as 2028.

But the stock is trading around €1,195, roughly 40% below the 52-week high of €1,995 hit in September last year. Since the start of 2025, the shares have lost about a quarter of their value, though they sit roughly nine percent above the May trough of €1,099.80. Against that backdrop, Morgan Stanley added to the pressure on Tuesday by downgrading the entire European defence sector from Overweight to Equal-weight, citing a lack of near-term catalysts and fading momentum.

The US bank also flagged a political risk: serious ceasefire talks between Russia and Ukraine could severely dent market sentiment. For Rheinmetall, the downgrade amplifies a weakness already visible in the charts. The stock trades well below its 200-day moving average, and the relative strength index sits at 41—neither signalling panic nor a quick reversal. Analysts see capital flowing instead into European mining and semiconductor stocks.

The Victor U250 agreement alone is unlikely to close the valuation gap. What it does do is underline Rheinmetall’s strategic shift from a pure armoured-vehicle builder toward a supplier of autonomous systems. Whether NRW actually becomes the production site still depends on further assessments, and a final decision has yet to be made.

Three upcoming events could reignite interest, according to Reuters. The Eurosatory defence show in June offers a platform for major order announcements. The NATO summit follows in early July, and then the half-year results are due. If none of those provide fresh impetus, the stock may test its recent lows again. Morgan Stanley remains long-term positive on defence, but for now the market wants concrete proof—and a drone partnership alone isn’t enough to change the flight path.