$MRLN Part 3: The DAWG, the $54.6B, and Why Merlin Is Positioned to Win the Autonomous Warfare Contract Wave
The Pentagon just proposed a 24,166% budget increase for autonomous warfare. Here is why $MRLN is the most direct public-market beneficiary — and what the contract math looks like from here.
Shawarma Capital · April 2026
In our first post, we laid out the full Merlin Labs ($MRLN) thesis: the Brainstem, the A-GRA architecture, the $105M USSOCOM IDIQ, and why this might be the most asymmetric name in defense tech. In the second post, we stress-tested the valuation against the ugly stuff: the PIPE terms, the 12% cumulative preferred, the full ratchet anti-dilution, the real 129.4M share count. The expected value math held up.
This is the third post. And something changed.
On April 6, 2026, Aviation Week published a debrief on a little-known Pentagon organization called the Defense Autonomous Warfare Group, the DAWG. In the proposed FY2027 budget, the Trump administration requested $54.6 billion for the DAWG. That is up from $225 million in FY2026. The year-over-year increase is 24,166.67%. That number is not a typo.
For context: $54.6B is just below the entire FY2026 Marine Corps budget ($57.2B). It exceeds Zimbabwe’s 2025 GDP. It represents 15% of the Pentagon’s $350B reconciliation budget proposal. This is not a rounding error in a defense appropriations bill. This is a structural reallocation of American military spending toward autonomous warfare at a scale that has no peacetime precedent.
Merlin Labs is a direct beneficiary. This post explains exactly why and what the contract math looks like if even a fraction of this budget finds its way to the platforms Merlin already has under contract.
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I. The DAWG: What It Is, What It Funds, and Why It Matters
The Defense Autonomous Warfare Group launched quietly inside the Pentagon in late 2025 with a $225 million FY2026 budget. Almost nobody covered it. Senator Roger Wicker, chairman of the Senate Armed Services Committee, spelled out its mandate at a March 5 hearing on the small drone industry:
Sen. Roger Wicker, SASC Chairman: While the Drone Dominance efforts focus on smaller, Group 1 first-person-view drones, the DAWG will lead on larger one-way attack drones and small unmanned boats.
The DAWG’s two focus areas, one-way attack drones and unmanned maritime vessels, map directly onto two of the most validated asymmetric warfare concepts of the last four years. Ukraine denied Russia use of the Black Sea with swarming uncrewed boats despite having no traditional navy. Iran’s Shahed-family one-way attack drones reshaped threat calculus across the Middle East. The U.S. military’s Hellscape strategy for the Taiwan Strait is built around the same two weapons categories at scale.
The proposed $54.6B budget is not just a funding line. Aviation Week’s Steve Trimble argues it signals the Pentagon’s intent to transform the DAWG into an Autonomous Warfare Command, a joint organization at the same tier as U.S. Space Command. A $54.6B budget is not administered by a group. It is the budget of a service branch.
Chart 1: DAWG Budget FY2026 to FY2027 Proposed (Source: Aviation Week / Pentagon FY2027 Budget Request)
II. The Broader DoD Autonomy Spend Ramp
The DAWG is the headline, but it is not the only data point. The FY2026 defense budget allocated $13.4 billion specifically for autonomy as a new standalone budget line, the first time in history the Pentagon created a dedicated autonomy appropriation. The FY2027 reconciliation proposal layers $54.6B of DAWG authority on top of that baseline. DoD spending on autonomous systems, including drones, AI-enabled platforms, and the software stacks that run them, is compounding at a rate that has no analog in the modern defense budget.
Chart 2: DoD Autonomous Systems Spend Ramp, FY2024 to FY2027E (Sources: DoD Budget Documents, Aviation Week)
This is the structural tailwind that makes the Bek labor-TAM thesis realistic on an accelerated timeline. When we wrote Part 1, the autonomous warfare budget was a new line item. It is now the fastest-growing line in the entire defense budget by several orders of magnitude.
III. Why $MRLN Is a Direct Beneficiary
Merlin does not make one-way attack drones. It does not build uncrewed boats. But the DAWG’s mandate and the broader DoD autonomous warfare push create four direct contract pathways for Merlin that were either nonexistent or theoretical twelve months ago.
Pathway 1: C-130J Autonomous Resupply at Scale
The $105M USSOCOM IDIQ covering the C-130J was the anchor contract in our original thesis. The DAWG budget context changes the ceiling on that contract. USSOCOM is explicitly tasked with supporting Hellscape-type autonomous resupply and logistics missions. The C-130J is the primary heavy logistics platform in that role. A DAWG budget at $54.6B means the procurement authority exists to convert IDIQ ceilings into funded task orders at a pace Merlin’s current contract structure already supports.
Pathway 2: KC-135 Autonomous Tanking
The KC-135 program at MacDill AFB targets a 376-aircraft fleet. Autonomous aerial refueling is one of the most operationally valuable near-term applications of the Merlin Pilot. It eliminates the human crew requirement on a mission profile that is highly repetitive, high-duration, and increasingly contested. The DAWG’s one-way attack drone mandate creates demand for aerial refueling support at volumes that dwarf current manned tanker availability. Merlin’s KC-135 program is precisely positioned for this.
Pathway 3: SHIELD / Golden Dome IDIQ
Merlin was awarded a spot on the $151 billion SHIELD IDIQ in late 2025, the primary contract vehicle for Trump’s Golden Dome missile defense initiative. Golden Dome is explicitly an autonomous systems program. SHIELD task orders fund autonomous intercept, ISR, and logistics platforms across every domain. Merlin’s SHIELD position is a direct pipeline into the same autonomous warfare budget the DAWG commands.
Pathway 4: A-GRA Layer 3 on Collaborative Combat Aircraft
This is the additive thesis from Part 1 and Part 2, and it becomes dramatically more valuable in a world where the DoD is spending $54.6B on autonomous warfare. The USAF’s Collaborative Combat Aircraft program targets at least 1,000 new-build autonomous aircraft by 2030. Every CCA needs DO-178C Level A certified flight control software at Layer 3 of the A-GRA stack. Merlin signed the CRADA for exactly this role in October 2025. At $2 to $3M per-tail integration economics, 1,000 CCAs represent $2 to $3B of additional contract ceiling stacked entirely on top of the legacy retrofit thesis.
Chart 3: MRLN Known Contract Portfolio and Ceiling (Sources: SEC Filings, USASpending.gov, AFWERX Announcements)
IV. What the DAWG Budget Means for MRLN Unit Economics
Let’s run the math simply. Merlin’s per-aircraft economics: $3M one-time integration fee, $2M per year recurring software license, 10 to 15 year platform life. Customer payback under one year (pilot labor savings run approximately $7M annually per aircraft at single-pilot or uncrewed operations). Customer ROI 3 to 4x annually.
Key finding: Even in the bear case, C-130J execution only, 300 aircraft, 7.5x EV/Revenue multiple, Merlin’s implied share price is approximately $41 on 129.4M shares outstanding, representing roughly 5.9x upside from the current $7 entry. The DAWG budget does not change the bear case math. It makes the base case ($213) and bull case ($294+) substantially more probable.
V. Capital Structure and Preferred Accrual Clock
Nothing in the DAWG news changes the capital structure. We covered it fully in Part 2. But for readers coming to this post first, the key facts:
129.4M shares currently outstanding (not the 101.06M Crossroads used)
Series A Preferred: 12% cumulative annual dividend on 10.2M shares, equal to $31.3M per year accruing whether paid or not
Full ratchet anti-dilution: any equity raise below $10/share resets the preferred conversion price downward, amplifying dilution
Full liquidation preference: $260.6M at issuance, growing at 12% per year to approximately $448M by 2032
Fully diluted share count at maturity: approximately 162.2M (adds roughly 21.7M preferred conversion plus 11.05M PIPE warrants)
Approximately $146M cash on balance sheet at close; approximately $50 to $60M per year net burn; runway to mid-2028 base case
Chart 4: Series A Preferred Accrual Clock, Liquidation Preference Plus Cumulative Dividends, 2026 to 2032
The preferred structure is a burden, not a killer. At 20x on $1.6B ARR, the $448M accumulated preferred claim is 1.2% of enterprise value. But in a distressed scenario where the stock stays below $12, the liquidation preference takes priority over common shareholders. This is the race condition: Merlin must demonstrate revenue ramp before the preferred converts into a genuine overhang problem.
VI. Catalyst Calendar: What Moves This Stock
Multiple expansion in defense AI is not gradual. Palantir re-rated 16x in two years through five discrete catalysts. Shield AI doubled its private valuation in a single quarter after the CCA win. MRLN’s price trajectory depends on similar milestone events. Here is the full known catalyst map:
Chart 5: MRLN Catalyst Calendar, Contract, Regulatory, and Market Events (2026 to 2028)
VII. Catalyst Impact Matrix
Not all catalysts are equal. Below is the probability vs. enterprise value impact matrix that guides our conviction weighting:
Chart 6: Catalyst Probability vs. EV Impact Matrix (Shawarma Capital estimates)
Shawarma Capital view: The highest-conviction near-term bet is analyst initiation combined with Q1 earnings. Both are high-probability, medium-impact events that together transition MRLN from zero institutional coverage to active buy-side discovery. That transition, not the CCA contract, is likely to be the first major re-rating catalyst.
VIII. Scenario Outputs: Bear, Base, Bull
The framework below is unchanged from Part 2, using Crossroads Capital’s EV/Revenue methodology, corrected for actual share count (129.4M) and modeled with year-by-year peer-calibrated multiples. The DAWG budget development increases the probability weight on base and bull outcomes without changing the mechanics.
All price targets on 129.4M current shares outstanding. See Part 2 for fully diluted adjustments. Current price approximately $6 to $8 (April 2026).
Note: The DAWG budget has not been approved by Congress. It is a proposed budget request. Probability-weighting appropriately adjusts for legislative risk.
IX. Probability-Weighted Expected Value
Under our base-rate probability framework (25% total loss / 35% bear / 30% base / 10% bull), the probability-weighted expected value at 2032 maturity is approximately $102 per share from a $7 entry, implying a 15x expected return over six years. The DAWG budget development, if enacted, shifts probability mass from bear toward base, increasing the expected value further.
Bottom line: The asymmetry is the point. You risk 1x to make 15x in expected value. The bear case alone, 35% probability, returns 5.9x. That is not a rounding error. That is the mathematical definition of asymmetric.
X. Risks: The Honest Accounting
We have been bullish across three posts. Here is the complete risk register, stated plainly.
Congressional rejection of DAWG budget. The $54.6B is a proposal. Congress has rejected or materially cut large autonomous warfare requests before. If the DAWG budget is cut significantly, the structural tailwind thesis weakens, though Merlin’s existing contracts are funded regardless.
Cash runway. Approximately $146M at close, approximately $50 to $60M per year net burn. Runway to mid-2028 in the base case. If revenue ramp disappoints, a dilutive raise before 2028 becomes necessary and full ratchet anti-dilution on the Series A Preferred amplifies the damage of any raise below $10 per share.
12% preferred accrual. $31.3M per year accumulates whether paid or not. By 2032, the accumulated preferred claim reaches approximately $448M. Punitive in distressed scenarios; manageable at scale.
Anduril / Shield AI vertical integration. If either company absorbs the Layer 3 certification burden in-house, Merlin’s A-GRA brainstem opportunity shrinks. Anduril could do this at a cost of 3 or more years and $200 to $400M. The CRADA architecture suggests the Air Force is pushing toward a modular, vendor-neutral substrate. That is not yet a guarantee.
Reliable Robotics competition. Reliable also holds a CRADA. Also has FAA certification pedigree. Also has a Cessna Caravan platform. The Air Force has not picked a single Layer 3 winner. Merlin may share the market rather than own it.
SBIR eligibility risk. The USSOCOM IDIQ was awarded under SBIR sole-source authority. As Merlin’s valuation grows, it may eventually lose small-business eligibility and the sole-source contracting mechanism that produced its largest contract.
Going concern language. Auditors raised substantial doubt about going concern in January 2026 pre-SPAC financials. Almost certainly resolved by PIPE proceeds. Short sellers can weaponize the language regardless.
SPAC stigma. Institutional investors with blanket anti-SPAC policies will not initiate coverage or build positions until the stigma fades, which can take 12 to 24 months post-listing. The 61.6% day-one drop was stigma, not fundamentals.
CEO execution risk. Matt George’s prior company, Bridj, failed in 2017. Glassdoor reviews flag management disorganization. Eight reviews averaging 3.6 out of 5. The bull read: he learned from Bridj and spent seven years building Merlin properly before going public. The bear read: the reviews are recent.
XI. Investment Conclusion
Three posts. Three stress tests. The thesis has held up.
What has changed since Part 1: The Pentagon proposed a 24,166% budget increase for the exact two weapons categories, one-way attack drones and unmanned maritime platforms, that require the autonomous flight software, logistics infrastructure, and AI-certified control layers that Merlin builds. The DAWG budget is not funded yet. But its existence at $54.6B in a proposed FY2027 budget signals something that cannot be unseen: the U.S. military is reorganizing around autonomous warfare at the scale of a service branch, and the procurement machinery to fund the platforms in Merlin’s contract pipeline is being built right now.
What has not changed: the bear case still implies 5.9x. The expected value is still approximately $102 per share on a $7 entry under moderate probability assumptions. Zero sell-side analysts cover the stock. The CMO was hired March 31. The first institutional discovery phase has not begun.
Shawarma Capital view: The market is pricing Merlin like a $32M revenue defense subcontractor with SPAC stigma. It is the certified flight control substrate that will run on every autonomous aircraft the U.S. military fields this decade, with a $54.6B procurement budget being assembled to buy them.
* The asymmetry is real. Even the bear case ($41 on 129.4M shares) implies roughly 5.9x upside from $7, requiring only that Merlin execute on its existing C-130J contract at compressed 7.5x multiples. Total loss requires burning through $146M without delivering meaningful product.
* Near-term is catalyst-driven. MRLN will likely trade $5 to $12 until CDR passage, analyst initiation, or contract expansion materialize. The market cannot price a $37B+ maturity EV today. It prices the probability and timing of those catalysts.
* The DAWG budget is a structural tailwind, not a guarantee. Congressional approval is required. But the direction is unmistakable: the DoD is spending at a scale that benefits every platform in Merlin’s pipeline.
* Expected value: approximately $102 per share under moderate assumptions (25% loss / 35% bear / 30% base / 10% bull), implying roughly 15x expected return from $7 over 6 years.
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Sources
1. Aviation Week / Aerospace Daily and Defense Report: “Debrief: Pentagon’s Little-known DAWG Fetches $54.6B In Spending Plan,” Steve Trimble, April 6, 2026
2. Crossroads Capital: “The Long Duration Case for Merlin Labs,” March 23, 2026
3. Shawarma Capital: “$MRLN: 54x Upside Hiding in a De-SPAC,” April 8, 2026
4. Shawarma Capital: “$MRLN Part 2: Stress-Tested and Standing,” April 8, 2026
5. SEC: MRLN FY2025 Results (Exhibit 99-2)
6. StockAnalysis: MRLN Statistics and Financials, April 2026
7. Contrary Research: Anduril Industries Full Profile
8. Sacra: Shield AI Revenue and Valuation
9. Fortune: Shield AI $12.7B Series G, March 2026
10. Finbox: Palantir EV/Revenue History
11. GuruFocus: Palantir EV/Revenue Historical Range
12. DOL/Signac LLC: Palantir IPO Valuation Expert Analysis
13. Washington Technology: Merlin Labs IPO Coverage, March 2026
14. MarketScreener: Rocket Lab Valuation History
15. TSG Invest: Anduril Valuation History
16. Fast Company: IronNet Cybersecurity, Rise and Fall
17. J.P. Morgan: Defense Tech Innovation and Startup Base Rates
18. Aventis Advisors: AI Startup Valuation Multiples 2025
19. HBS (Shikhar Ghosh): VC-Backed Company Failure Rates
20. CNBC: Palantir S&P 500 Inclusion, September 2024
21. AFWERX: CRADA Announcement, Merlin Labs A-GRA Contingency Management, October 2025
22. Senate Armed Services Committee: Hearing on Small Drone Industry, March 5, 2026
23. USASpending.gov: MRLN Contract Awards, April 2026
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I am long $MRLN equity. This is research synthesis, not investment advice. You should not buy or sell securities based on anything I write. I am not a registered investment advisor; I do not owe you a fiduciary duty; my conclusions could be wrong in ways I have not anticipated. Do your own due diligence.
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MRLN's $105M Ceiling Is Not the Revenue, It Is the Authorization
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MRLN: Part 4 - The Board, the Preferred Supernova, and the Catalyst Nobody