Key Takeaways:
- Kratos’ hypersonic systems business is poised for explosive growth.
- The propulsion systems and engines business is positioned to be a key growth driver, with production expected to ramp from hundreds to thousands of units.
- While Wall Street remains cautious on KTOS stock, the company enjoys a strong position in the defense vertical.
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Kratos Defense & Security Solutions (KTOS) has become a critical player in next-generation defense technologies, focusing on affordable solutions in high-priority areas like hypersonics, unmanned systems, and microwave electronics.
While KTOS stock appears overvalued at its current price of $36/share and might pull back over the next 12 months, its unique position in the rapidly growing defense segments makes it a compelling long-term investment opportunity.
Let’s examine three key reasons why KTOS stock could deliver substantial returns for patient investors who can look beyond valuation concerns in 2025.
1. Hypersonic Systems Leadership
Kratos has established itself as a leader in affordable hypersonic systems. It has developed a comprehensive franchise with rocket motors and operational flight vehicles. This first-mover advantage gives Kratos a competitive edge in one of defense’s fastest-growing segments.
Its Dark Fury hypersonic vehicle has completed its initial flight at hypersonic speed under a customer-funded contract. Dark Fury demonstrates exceptional speed, range, and precision, at “an extremely low cost point.” This enables Kratos to provide affordable hypersonic capabilities at scale.
Importantly, Kratos has orders for approximately 70 SRMs (solid rocket motors), including its Zeus system, for upcoming hypersonic missions.
Most of these orders target specific customers or programs like MACH-TB, indicating strong demand visibility.
Management expects this business to accelerate significantly in late 2025 and throughout 2026, becoming its fastest-growing segment with steady profit margins.
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2. Propulsion Systems Sees Demand Surge
Kratos’ propulsion systems business, particularly its jet engines, is experiencing robust demand as the Department of Defense prioritizes lower-cost cruise missiles, drones, and loitering munitions that can be produced at scale.
Its KTT division is on track to manufacture several hundred small jet engines in the second half of 2025, with production quantities expected to “substantially ramp” in 2026 and again in 2027.
CEO Eric DeMarco highlighted that certain customers “must have a second source” for engines because “the quantities that are coming are staggering and there can’t be a single point of failure.”
This suggests Kratos is well-positioned to capture market share in propulsion systems for new missile programs, drone systems, and loitering munitions.
The company’s partnership with General Electric Aviation on low-cost turbofan jet engines strengthens its position, providing credibility and manufacturing capacity for what DeMarco describes as “one of our primary growth drivers this year” and beyond.
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3. Strong Backlog and Pipeline Support Long-Term Growth
Kratos ended Q1 of 2025 with a book-to-bill ratio of 1.2:1 and a twelve-month book-to-bill ratio of 1.2:1, indicating strong future revenue visibility.
Moreover, the company’s pipeline stands at approximately $12.6 billion, an all-time high, even after converting numerous opportunities into backlog during the quarter.
This strong pipeline reflects a sea change in defense procurement philosophy. CEO DeMarco explained that certain customers have “decided to go with smaller technology-based companies like Kratos” when they offer viable alternatives to traditional defense contractors.
Similarly, government stakeholders increasingly prefer to purchase existing, production-ready systems rather than funding “millions or billions in customer-funded R&D over extended periods of time for the so-called maybe someday perfect system.”
This shift plays directly to Kratos’ strengths as it aims to invest in developing working products before securing contracts.
Management expects organic revenue growth of approximately 10% in 2025 and 13-15% in 2026, with substantial margin improvement as high-margin businesses like hypersonics and propulsion systems become larger contributors to the overall revenue mix.
Why KTOS Stock Looks Overvalued Today
Analysts have an average price target of $35 for KTOS stock, which is somewhat paradoxically lower than the current trading price.
This suggests that while analysts see strong fundamental performance ahead, they also recognize that the stock could be overvalued today.
Despite positive growth drivers, investors should approach KTOS stock with caution in the near term. The stock trades at a forward P/E ratio of approximately 66x, well above its historical 5-year average of 47x and higher than many defense industry peers.
This premium valuation leaves little room for error and could result in heightened volatility or pullbacks on execution missteps or broader market corrections.
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Also, free cash flow remains negative as the company invests heavily in manufacturing capacity and inventory ahead of anticipated revenue growth. While management positions these investments as customer-aligned and likely to generate acceptable returns, they indicate a cash drain that investors should monitor.
Nevertheless, for investors with a longer time horizon who can tolerate volatility, KTOS stock offers exposure to some of the fastest-growing segments in defense. Its proven capabilities in hypersonics, propulsion, and unmanned systems are increasingly aligned with national security priorities.
Analysts tracking KTOS stock expect adjusted earnings to expand from $0.49 per share in 2024 to $0.82 per share in 2027. If the stock is priced at 60x forward earnings, it will trade around $49 in early 2027, above the current price of $36.
TIKR Takeaway for KTOS Stock
Kratos Defense represents a unique investment opportunity in the defense sector. While current valuations appear stretched and could lead to pullbacks, the company’s long-term growth trajectory remains promising as it executes on its $12.6 billion opportunity pipeline.
Investors may want to consider establishing small positions at current levels and adding on any significant weakness, particularly if KTOS stock retreats toward its historical valuation norms.
Is KTOS stock a buy over the next 24 months? Use TIKR to check the stock’s analyst price targets and growth forecasts to see if it is undervalued today.
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any stocks mentioned. Thank you for reading, and happy investing!
