Despite the extreme risk and volatility, penny stocks can deliver life-changing returns in short time frames. And anyone who has recently invested Defense Holdings (LSE:ALRT) learned this first-hand.

The rising defense technology enterprise has seen its market capitalization rise by 5,500% in the past 12 months alone. To put this performance into perspective, the initial investment of £10,000 is now worth £560,000! And for those who invested in an ISA, that's a £550,000 gain that is completely tax-free!

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Even after this spike, the group's market capitalization and share price remain in penny territory at £54m and 2.24p respectively. As such, another 5,500% gain may not be out of the question in the long term. So, the question now becomes: Should investors rush into buying shares in this business?

What is behind the boom?

Earlier this year, Defense Holdings made a big impression at the Defense Equipment International 2025 conference.

Although a young organisation, it is already collaborating with the UK Ministry of Defense to develop AI-powered software systems for applications across autonomous drones, cybersecurity and secure communications. Subsequently, this previously unknown business became on the radar of many institutional investors.

Since then, the business has achieved multiple major milestones. Its flagship project, Ixian, is on track for commercial launch, perhaps as early as next year. At the same time, the administration is cooperating with the senior levels of NATO. In fact, the company recently received an invitation to showcase its technology at the NATO Task Force Maven Industry Day later this month.

Simply put, these businesses have captured the attention of investors and governments alike. If it can meet or even exceed expectations, another huge jump in stock prices could be on the horizon.

What's next?

The global aerospace and defense market is estimated to be worth $847 billion in 2025, and some analysts expect it to grow to $1.47 trillion by 2032. Not all of that market is tied to Defense Holdings. But for a company worth £54m, seizing a small slice of this opportunity could be transformative.

However, while this prospect is undeniably exciting, it is crucial to highlight that without any commercial defense products currently available, the works remain untested and unproven.

Governments are showing early interest. But whether its technology will meet expectations and translate into impressive sales is anyone's best guess at this point. What's more, given the secret nature of most of its technological aspects, making comparisons with existing systems more difficult.

This also means that the 5,500% jump seen so far has been driven almost entirely by speculation and expectations rather than any existing fundamentals. This is nothing unusual for penny stocks. But if there is even the slightest sign of trouble, Defense Holdings' stock price could collapse as quickly as it rose.

I prefer investing in companies that have a more realistic foundation. As such, this is not a stock I would rush out to buy now. But with more time to develop, this company could be a very profitable opportunity. That's why I've already added it to my watchlist.