Here's Why I'm Finally Investing in Kratos Defense Stock

I first wrote about Kratos Defense & Security Solutions (NASDAQ: KTOS) in October 2025, and at the time, I recommended waiting for a more reasonable valuation. While the company was one of the more interesting drone stocks, it was also trading for as much as 200 times forward earnings.

The share price and valuation have decreased since then, and Kratos has notched several recent contract wins. After deciding to sit on the sidelines six months ago, I'm confident enough in Kratos now that I've put money behind it.

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The drone business is booming for Kratos

Kratos's flagship product is the Valkyrie, an unmanned combat vehicle that flies alongside F-35s, F-22s, F-15EXs, and F-18s. In January, the U.S. Marine Corps awarded a $231.5 million contract to Northrop Grumman and Kratos to build Valkyrie drones that will fly alongside crewed fighters.

The Marine Corps isn't the only high-profile customer, either. The Air Force and multiple foreign military customers have also committed to it, and Kratos is ramping up production to meet demand. CEO Eric DeMarco has announced a plan to increase the rate of production to approximately 40 Valkyrie aircraft per year by the end of 2027, up from about eight now.

In addition, Kratos completed initial flights of its Mk1 Firejet tactical drone in April. What's notable about the Mk1 Firejet is its sub-$500,000 price point. Recent military conflicts in Ukraine and Iran have demonstrated the value of affordable drone technology, and the Department of Defense wants low-cost attack drones that defense companies can produce at scale. With that in mind, the Mk1 Firejet looks like a promising addition.

The numbers are catching up to the share price

I was hoping to see Kratos increase its top and bottom lines, and it succeeded on both counts in 2025. Full-year revenue increased 19% to $1.3 billion, and net income increased 35% to $22 million. The income is still fairly modest, to be sure, but it's moving in the right direction, and the company invests heavily in R&D.

It's also likely that earnings will accelerate this year and the next as the value of Kratos's contracts goes up. And on April 8, Kratos announced a $446.8 million contract with the Space Force's Space Systems Command for missile warning and tracking systems.

Management forecast revenue of roughly $1.6 billion to $1.7 billion in 2026, which would mark another solid increase. But that guidance was issued before the contract announcement with Space Force, so it wouldn't be a surprise if Kratos beat those expectations.

I should be clear that even with the recent pullback, Kratos still trades at a premium and is a risky investment. But I believe the risk-reward ratio has shifted over the last six months. A growing list of government contracts and an impressive drone lineup make Kratos a worthwhile investment in my book.

Lyle Daly has positions in Kratos Defense & Security Solutions. The Motley Fool has positions in and recommends Kratos Defense & Security Solutions. The Motley Fool has a disclosure policy.