Merlin Labs builds the software that lets big aircraft fly themselves. It retrofits planes the military already owns, starting with the C-130J cargo hauler, so they can fly with a smaller crew, and one day no crew at all. The engineering milestones are real. The revenue is still tiny, and the stock has fallen from $17 to about $1 on a flood of new shares, not on the business breaking. This is an optionality note, and it is labeled like one.
Scale is 0–50%/yr, and the bull math runs off the top of it. Returns run from Friday's $1.095 close over five years, using the research scenarios ($1 bear, $5 base, $10 bull) as the end prices. At $1.10 the drawdown does heavy lifting in these percentages. The gates described below still have to be earned.
Merlin is building an operating system for autonomous flight that fits into aircraft that already exist. Instead of designing a new plane, it retrofits the fleets the military already owns, starting with large cargo aircraft. The company went public in March 2026 through a merger, and the pitch is simple: pilots are scarce, the fleets are huge, and autonomy that bolts onto existing planes is far cheaper than buying new ones.
Every program runs in three phases. First, paid engineering to adapt the software to a specific aircraft. Second, physical installation onto real planes. Third, the prize: a recurring license, roughly $2 million per aircraft per year for the life of the fleet. Today Merlin is still in phases one and two. Second-quarter revenue was $2.2 million of engineering work. The annuity has not started, and the whole valuation question is whether it ever does.
The anchor program is the C-130J transport fleet, under a SOCOM contract. The design review finished in June, which is real progress. What is missing is the funded task order to install the system on a first aircraft, the gate the research calls G1. After that comes the first licensed tail, G3, not expected before late 2027 or 2028. On the per-tail math, about 75 SOCOM C-130Js at $2 million a year is roughly $150 million of potential annual licensing, before the wider Air Force fleet of 300-plus aircraft.
Not because the business broke. About 44 million shares unlocked on September 16 and flooded a thin float. Behind that sat the October 15 reset of a preferred stock conversion price, which settled at its $5 floor and takes the fully diluted share count to roughly 153 million. The common stock also sits behind about $260 million of preferred stock collecting 12% a year. A mid-October drawdown check found no contract lost, no guidance cut, and no insider selling. The reset then passed quietly, and both closes since have held above $1.
Cash was $183.9 million at June 30, with no debt, against a burn of roughly $28 million a quarter. That funds the plan into fiscal 2028: about six quarters of runway to reach the gates. The trade-off is that revenue guidance for the second half of 2026 is only $4 to $6 million, and the Street expects about $24.5 million for 2027. Weighting the research scenarios, the expected value works out near $4.55 a share against Friday's $1.095 close. That gap is the market pricing the gates as unlikely. It is a judgment call, not an arithmetic error.
Run through a defense lens, Merlin today is unfunded optionality: no production contract of record, no licensed tail, certification still ahead. The upgrade path is concrete, though. A funded integration task order, second-half revenue inside the guided band, and burn that matches the runway claim would each move this note. Until at least the first one prints, this stays watchlist material, sized like a speculation if sized at all.
The original plan pointed to about $32 million of 2026 revenue. The current guide implies $7 to $9 million. When a company misses its own map that early, every later number deserves a discount.
The preferred conversion at the $5 floor adds roughly 52 to 55 million shares, warrants reset alongside it, and the preferred collects 12% a year while it waits. Common shareholders are last in line behind about $260 million of preferred claims.
There is still no funded integration task order. The KC-135 tanker demo window passed in September with no public confirmation, and the cargo partnerships with IAI and World Star are non-binding agreements, not contracts.
About six quarters of runway at the current burn. If the gates slip past the cash, a capital raise at a low price would reset the per-share math again, and a raise under $2 is one of the research file's listed break points.
Merlin withdrew its small-aircraft certification effort in September to aim at large aircraft, where the money is. That is the right target and the longer road. Nothing licenses until regulators sign off.