KRTOS or not KRTOS -- that is the question...

$KTOS : Great Tech, Tough Math

I’m neutral on Kratos Defense. The company is positioned in some of the fastest-growing areas of defense (unmanned systems, hypersonics, and satellite tech) but the valuation already bakes in years of perfect execution. I like the story, but I don’t like the price.

$KTOS has come a long way from its small-cap contractor roots. It now builds reusable jet-powered drones, hypersonic test vehicles, and satellite ground systems used by the U.S. military and allies. In short, it’s a defense tech company that behaves more like a startup fast-moving, innovative, and always investing ahead of demand.

That ambition is paying off on the top line. In the first half of 2025, revenue rose 13% y/y, supported by record backlog of $1.4 billion and rising contract wins. The Unmanned Systems division, which makes tactical drones like the Valkyrie, is the star, up nearly 30% last year and on pace for double-digit growth again in 2025. The company also benefits from growing budgets for missile defense and hypersonic programs. The macro setup is about as good as it gets for a firm in this space.

The problem is profitability. Kratos’ operating margin last quarter was barely 1%. That’s a rounding error compared to defense giants like $LMT or $RAY, which routinely post 10–15%. Management blames cost overruns on fixed-price contracts and higher material costs that couldn’t be passed through. They’re working to fix it by negotiating new production lots, building some products ahead of awards, and investing in an in-house engine facility to cut supplier dependence. But it takes time. For now, each additional dollar of revenue barely drops to the bottom line.

That’s where valuation becomes hard to justify. $KTOS trades like a software company, not a contractor. The stock is up more than 300% in the past year, and current multiples reflect that euphoria: over 200x forward earnings and roughly 140x forward EV/EBITDA. Even its drone peer $AVAV looks cheap by comparison. The market is clearly paying for the dream, not the data.

I’m not dismissing the dream. Kratos is building real technology with long-term relevance. The Valkyrie’s designation as a U.S. Department of Defense Program of Record means real procurement dollars are coming. The company’s presence in hypersonic testing and space communications could compound into something much larger by the late 2020s. Management’s opportunity pipeline ($13 billion) is proof of growing credibility with top-tier customers.

But to justify the current price, execution must be flawless. That means improving margins, scaling production efficiently, and showing sustained cash generation. If they can get EBITDA margins into the mid-teens, the stock’s premium could start to make sense. Until then, any slip in guidance or contract delays could hit hard, because the expectations bar is sky-high.

For me, Kratos fits the “great company, risky entry” category. It’s an exciting story but at today’s valuation, I don’t see an attractive risk/reward. I’d rather wait for one of two things: a meaningful pullback that resets expectations, or tangible proof that margins are finally expanding.

If Kratos can pull that off, the upside is substantial. A few years from now, it could look like the Palantir of defense hardware smaller, faster, and more tech-driven than its legacy peers. But as of today, the math doesn’t add up to chase it.

For now, I’m staying on the sidelines watching the technology advance and waiting for the numbers to catch up with the narrative.