Thales Rides Europe’s Defense Wave Toward Unseen Heights

Summary

• Europe’s new 5 %‑of‑GDP defense pledge is funneling billions into long‑dated contracts, and Thales is landing a share in nearly every category—from radars to cyber tools.
• A record €51 billion backlog now covers multiple years of revenue, giving Thales rare earnings visibility even if the economy stumbles.
• Unlike peers tied to single product lines, Thales mixes defense electronics, space, avionics, and cybersecurity—so one segment can slow while another accelerates.
• The recent Imperva acquisition could turn the cyber unit into a double‑digit growth engine, adding a tech kicker most defense primes lack.
• Shares trade at only a slight premium to slower U.S. rivals, yet Thales enjoys faster growth, fatter cash conversion, and a decade‑long European rearmament tailwind.

Introduction

After decades of steady but unremarkable growth, the company suddenly finds itself at the center of the European rearmament boom. This is not another short defense cycle, but a strong shift—one that is already showing up in Thales’s results and in its multi-year outlook. In my view, the stock’s rally to €250 is not a top but a pause before another rally. For long-term investors, Thales is the kind of high-quality “buy and hold” candidate that rarely comes along in the defense and technology sector.

The reason for this optimism starts with the June 2025 NATO agreement: after years of talk, member states finally agree to spend 5% of GDP on defense and civil security. It’s a target no one thought possible a few years ago. Now it’s policy, and that’s already unlocking multi-year contracts for everything from radars to cyber tools. In this new world, Thales stands out as a critical supplier in almost every area where governments are pouring money.

The Perfect Storm of Demand

What makes the next decade different isn’t just the raw size of Europe’s planned defense spending. It’s how that money will flow. Past cycles were patchy: a few good years, then budget cuts, then another round when threats re-emerged. Today, policymakers are building recurring outlays right into their annual budgets, shielding programs from election swings or fiscal “emergencies.” Thales’s order book is finally reflecting this. The company ended 2024 with a record backlog near €51 billion, up by more than €5 billion in a year.

France, Germany, the U.K., and eastern NATO states are outbidding each other for new radars, encrypted comms, advanced avionics, and anti-missile systems. Thales is the tech partner sitting in the middle: supplying the brains inside almost every major European platform.

Diversification as a Superpower

Unlike peers that put all their chips on hardware or services, Thales is active in everything from satellites and avionics to digital security and payments. It’s why the company can weather slowdowns in any one business and still report record results. In 2025, civil aviation is still recovering, and satellites have faced telecom weakness, but defense and cybersecurity are on fire.

That balance matters. In Q1 2025, Thales delivered organic sales growth of nearly 10%. Defense was up 15% on the back of radar and electronics orders, while Aerospace posted 8% growth as airlines and militaries both modernized cockpits and training equipment. The Cyber & Digital segment saw a slight dip in revenue, but this was due to a normalization in the travel-documents business after the post-pandemic surge, not a structural problem. Management expects the cyber business to accelerate as the integration of Imperva and other acquired assets kicks in. If Thales delivers on this, the company could soon have the most complete suite of cyber, defense, and aerospace tech in the region.

Orders Intake Is Healthy

Some might look at the recent order intake—€3.78 billion in Q1, down from a year ago—and worry the boom is already fading. That’s simply not the case. The prior year included two “jumbo” deals, both over €500 million, which skewed the comparison. Strip out that base effect, and new orders beat 2023 and 2022 levels. Importantly, Q1 included five contracts worth more than €100 million each, ranging from satellite deals for Space Norway and Japan to the “Argonaut” European lunar lander.

It’s not just the big-ticket contracts that matter. The core of Thales’s book is made up of hundreds of smaller deals. Orders under €10 million, which account for 60% of intake, kept growing. This speaks to the company’s day-to-day relevance in both mature and emerging markets.

What’s especially important is that the company reaffirmed all guidance for 2025: organic sales growth of 5–6%, EBIT margin between 12.2% and 12.4%, and positive free cash flow in line with profits. The Q1 start makes these targets look almost cautious.

More Than Just a Defense Play

Civil aerospace isn’t the growth engine it was in the last cycle, but it still plays a role. Avionics sales grew double-digits in Q1 as airlines updated fleets, and training/simulator sales got a boost from new defense and civil contracts. The space business, after two rough years in telecom satellites, is showing signs of life with three major satellite wins in Q1 alone.

What’s unique about Thales is that it captures spending not just from defense ministries, but from airlines, telecoms, and a long list of government agencies. This insulates it from politics and allows for smoother revenue growth. Even if air travel cools or a satellite cycle pauses, the other divisions will take over.

The Cyber Story

The Imperva acquisition in 2023 was a bold move, and it’s too early to call it a home run. Cyber revenue was flat in Q1, but the product side posted nearly 2% growth. The service business in Australia was slow, partly due to local elections and some margin pressure. Thales is addressing this by focusing on higher-margin accounts and integrating sales teams. The company expects the cyber division to accelerate in the second half of the year. If they can turn this into a double-digit growth engine, the upside for the group as a whole gets even stronger.

One thing is clear: Thales’s cyber ambitions go far beyond Europe. The company is using its global footprint to win business in the U.S., Asia, and emerging markets. Its local approach insulates much of its defense and cyber sales from tariff risk, as most U.S. revenue is generated domestically. Where new tariffs could bite, Thales is already re-routing supply and passing along extra costs.

Resilience in the Face of Macro Uncertainties

Trade wars and inflation are in the headlines, but Thales seems well prepared. About 75% of its U.S. revenue comes from operations within the U.S., and core defense sales are usually exempt from tariffs. The remainder—roughly a quarter of U.S. sales—can be redirected or have duties reclaimed under standard customs rules. Management has made clear that any direct impact from tariffs is contained, and that they are already executing mitigation plans where needed.

Interest rates are a concern for many industrials, but not here. Thales’s net debt is low, interest coverage is strong, and long-cycle defense contracts are rarely impacted by higher yields. Governments order for strategic reasons, not based on short-term finance costs. The bottom line: there’s no visible risk to the company’s ability to fund R&D, raise the dividend, or pursue bolt-on acquisitions.

How the Numbers Stack Up

Valuation always matters, even in a boom. At €250, Thales trades at around 23x forward earnings and about 14x EBITDA—high for an industrial, but reasonable for a company with a record backlog and years of visible growth ahead. Peers like BAE are now priced similarly, and U.S. competitors with slower growth aren’t much cheaper. The premium reflects Thales’s unique European and cyber leverage.

The dividend, raised to €3.70, now yields 1.5%. The payout ratio remains disciplined at about 40%, leaving cash for reinvestment. Free cash flow conversion has consistently run above 100% of net profit in recent years, so there’s room to support higher dividends if management wants to move more toward yield. For now, the focus remains on growth.

Looking at the Risks

Thales is exposed to a few threats. A sudden easing in global tensions could slow defense orders, but multi-year contracts already in place would keep factories running for several years. Large projects like FCAS or next-gen satellites can always go off-track, but the company has a solid record in delivery. The integration of cyber acquisitions is an execution test, but the groundwork (salesforce alignment, portfolio fit) is mostly done. A hard global recession would hit aerospace and some civil orders, but the bulk of Thales’s backlog is now tied to essential security needs.

The company’s ability to manage these risks is what gives me confidence. Even in the worst-case scenarios—short-term issues in cyber, a temporary delay in big awards—the multi-year outlook doesn’t break down. Thales’s global scale, steady cash generation, and diversified business mix all act as buffers.

Peer Check: How Does Thales Compare?

European rivals like Leonardo and Saab are solid in their own domains, but neither offers the same mix of defense, civil, and cyber technology. BAE’s backlog is larger, but it’s less exposed to high-growth cyber. U.S. giants like Lockheed Martin or RTX are more expensive, have slower growth rates, and are less geared to the unique tailwinds in Europe. Thales’s edge is not just in breadth, but in being able to cross-sell and integrate across these lines—a fact that is winning it contracts in places where others can’t compete alone.

Final Take: Still Early in This Upcycle

Thales is entering a new era. For the first time in a generation, it has both political and budgetary tailwinds behind it, a record backlog, and a growing share of high-margin cyber revenue. The share price already reflects part of this, but not all of it. If management executes and the macro environment doesn’t deteriorate, I see earnings growing at a high single-digit pace or better, and the stock could easily rerate even higher as the next cycle matures.

The recent dip from all-time highs gives patient investors a window. Thales is a multi-year investment in European security and technology. I rate Thales a Strong Buy for those willing to hold through the economic weather and let this new defense era play out. For once, it feels like the market’s caution is creating opportunity, not risk.