Kratos Defense & Security Solutions, Inc. (KTOS): A Bull Case Theory

We came across a bullish thesis on Kratos Defense & Security Solutions, Inc. on Uncle Stock Notes’s Substack. In this article, we will summarize the bulls’ thesis on KTOS. Kratos Defense & Security Solutions, Inc.'s share was trading at $76.10 as of November 28th. KTOS’s trailing and forward P/E were 585.38 and 158.73 respectively according to Yahoo Finance.

Kratos Defense & Security Solutions, Inc., a technology company, provides technology, products, and system and software for the defense, national security, and commercial markets in the United States and internationally. KTOS has entered a decisive phase, transforming from a high-concept defense innovator into a revenue-generating company.

In Q3 2025, total revenue rose 26% year-over-year to $347.6 million, led by a 36% surge in the unmanned systems segment driven by the production and delivery of Valkyrie drones. The company reported adjusted EPS of $0.14, exceeding expectations, and GAAP net profit of $8.7 million, marking a shift into profitability.

This performance reflects the execution of CEO Eric DeMarco’s vision of low-cost, AI-enabled expendable combat aircraft (CCA), now moving off the conceptual stage into actual production. While free cash flow remains negative at $41 million, this is primarily due to $28 million in strategic capital expenditures to build new factories, supporting a record $1.48 billion backlog and a $13.5 billion bid pipeline.

Kratos’s Government Solutions (KGS) segment remains a stable cash generator, benefiting from Defense Rocket Support Systems, hypersonic test targets, and Space/communications projects, including control systems for satellite constellations. The company’s long-term guidance is ambitious yet credible, with 15–20% revenue growth forecasted for 2026 and 18–23% for 2027, supported by both domestic demand and new international opportunities following MTCR export rule adjustments.

Valuation analysis shows FY26 forward P/S of 6.38x and a DCF-derived intrinsic value of $70–$85 per share, indicating the stock is reasonably priced relative to growth potential. Risks include execution challenges in scaling production, competition in the CCA program from Boeing and Lockheed Martin, and the timing of cash conversion. Nevertheless, Kratos is strategically positioned at the intersection of autonomous drones, hypersonic systems, and space communications, offering substantial upside if it successfully navigates these growth vectors.

Previously we covered a bullish thesis on Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) by Kooky_Lime1793 in January 2025, highlighting its leadership in unmanned systems and the $1.45 billion hypersonic test contract. The stock has appreciated ~166% since coverage. The thesis still stands as Kratos enters production and revenue generation. Uncle Stock Notes shares a similar perspective but emphasizes Q3 2025 drone deliveries and long-term growth guidance.

Kratos Defense & Security Solutions, Inc. is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 33 hedge fund portfolios held KTOS at the end of the second quarter which was 17 in the previous quarter. While we acknowledge the potential of KTOS as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.

READ NEXT: 30 Stocks That Should Double in 3 Years and 11 Hidden AI Stocks to Buy NOW 

Disclosure: None.