Cathie Wood's Ark Invest Has Bought $9.1 Million of Kratos Defense Stock So Far in July

So far this month, Cathie Wood's various Ark exchange-traded funds (ETFs) have bought about $9.1 million worth of stock in Kratos Defense & Security Solutions (NASDAQ: KTOS). With her recent buying, the position has grown to be the tenth largest across all Ark Invest ETFs, worth just north of $110 million as of the time of this writing.

That's a lot of enthusiasm for a defense company whose shares are down more than 33% this year. Yet even after that decline, it still trades at nearly 300 times trailing earnings -- a hefty premium. If you're wondering what Wood is seeing that other investors are overlooking, here are three reasons why the stock may be a buy.

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Drones have proven their worth

The Iran and Ukraine wars have shown the importance of drones, which have evolved from expensive supporting assets into the central drivers of attrition, surveillance, and strategy on the 21st-century battlefield. Drones that are (relatively) cheap have often defeated costly electronic defense systems, inverting the economics of air defense.

Kratos specializes in tech-driven defense hardware, including artificial intelligence-controlled combat drones priced at $3 million to $5 million, significantly less expensive than manned fighter jets, which cost more than $100 million apiece. The company had a $2 billion backlog of orders as of the end of the first quarter, and the Pentagon's fiscal 2027 budget request includes more than $70 billion specifically for military drones and anti-drone weapon systems, the technologies that Kratos directly addresses.

Kratos's Valkyrie XQ-58A has established the company's competitive edge as a proven supplier in the evolving drone warfare landscape. It's designed to fly sorties in conjunction with crewed fighter jets, during which it can scout ahead, absorb enemy fire, and deploy weapons.

The company, recognizing the rising demand for drones from the Pentagon and America's international allies, announced on July 6 that it is building a 106,000-square-foot expansion of its Oklahoma City manufacturing plant to increase jet drone production.

Kratos is a key player in the drone trend

Kratos is seen as an Nvidia equivalent in the drone warfare arena -- a key player in a field where artificial intelligence capabilities are redefining operational effectiveness. As the U.S. military increases its use of drone technology, it is looking for cost-effective solutions of a type that larger defense contractors have struggled to provide.

Kratos is expected to face increased competition from the likes of General Atomics, Anduril Industries, and Boeing, but its specialization in affordability and its rapid product development cycles give it a strategic edge. As military operations continue to adapt to the realities of modern warfare, companies that can deliver effective solutions at lower costs will likely capture larger portions of defense spending.

Kratos is already financially on solid ground

For the first quarter, Kratos reported revenue of $371 million, up 22.6% year over year, while earnings per share rose by 133% to $0.07. The company is forecasting full-year revenue between $1.7 billion and $1.76 billion, up 29% at the midpoint. It also predicts that its adjusted earnings before interest, taxes, depreciation, and amortization will land between $170 million and $176 million, up 44% at the midpoint.

The company isn't just a drone manufacturer; it has landed several high-value contracts across its core divisions this year, spanning space systems, rocket propulsion, air defense, and unmanned aerial targets.

Its biggest contract came in March from the U.S. Space Force, a $468 million follow-on Other Transaction Agreement. Kratos will build the essential ground management software and system infrastructure to support the military's Resilient Missile Warning and Tracking satellite constellation in medium Earth orbit.

Buying at the right time

Wood knows a good deal when she sees it, and many of her Kratos buys this year have come after the stock has fallen. Kratos operates at the nexus of the long-term trend toward the greater use of unmanned defense hardware.

The company's focus on low-cost manufacturing is endearing it to the Pentagon, and its expansion plans put it on track to scale up drone production. It's also important to note that it has a relatively broad product base, including counter-drone technology and infrastructure that connects orbital satellites to military networks. That diversity should serve the company well in the long run.

While its high price-to-earnings ratio is concerning, it is seen as a growth stock with great long-term potential.

James Halley has positions in Boeing and Nvidia. The Motley Fool has positions in and recommends Boeing, Kratos Defense & Security Solutions, and Nvidia. The Motley Fool has a disclosure policy.