UAV and hypersonic system defense contractor Kratos (NASDAQ:KTOS) has swung wildly over the last year from a 52-week low of just $24 to a high of $134. Despite its volatility, Kratos has maintained an overall upward trajectory, rising by more than 240 percent from where it was 12 months ago. Today, let’s examine the forces that have driven KTOS upward and look at whether Kratos stock is a good investment for 2026.
How Is Kratos Performing?
Kratos has seen its revenues climb for an impressive 16 quarters, with year-over-year revenue growth still at 26.0 percent in Q3. For the quarter, Kratos produced total revenues of $347.6 million. Even better for investors is the fact that management expects this revenue growth trend to remain strong over the next two years, with organic revenues projected to rise by 15-20 percent in 2026 and 18-23 percent in 2027. For Q4, Kratos expected to report revenue in the $320-$330 million range.
Although its earnings are still very modest, Kratos started posting positive EPS in Q4 of 2023 and has managed to remain profitable on a GAAP basis since that time. In Q3, Kratos delivered $8.7 million of net income, translating to EPS of $0.05. Though still quite small, this represented more than 2.5 times the net income it reported in the quarter a year earlier.
Kratos also still has a large backlog that has risen to nearly $1.5 billion, along with a $13.5 billion pipeline of bids and proposals. Among the large drivers of potential revenue for Kratos going forward is the United States’ proposed Golden Dome defense system, a key defense objective of the current administration. Kratos recently opened a new hypersonic system manufacturing facility in Maryland that will increase its ability to meet demand for cutting-edge technology for Golden Dome and other initiatives.
Analysts are also expecting strong earnings growth ahead for Kratos. The consensus EPS estimate for 2026 currently stands at $0.31, itself a large jump from the trailing 12-month EPS of just $0.12. Some bullish estimates put the forward earnings even higher at over $0.50 per share.
Has Kratos Become Overvalued?
While the road ahead for Kratos could be promising, the stock already has enormous amounts of forward growth priced in. KTOS has risen to trade at over 980 times earnings in a sector that averages a P/E of only about 20. The price-to-operating-cash-flow ratio is similarly astronomical at over 500, and even the P/S ratio of 15.1 is more than 15 times the average across the sector.
Kratos has also climbed slightly above a rather bullish set of analyst price targets. The consensus target for KTOS is $116.44, about 3.4 percent below the most recent price of $120.59. The range of price forecasts for Kratos, however, is very broad, ranging from as low as $83 to as high as $150. The consensus rating on KTOS is still a buy, with the stock holding 12 buy ratings, 3 holds and no sells.
Anecdotally, it’s also worth noting that KTOS has seen some downward pressure in recent days due to Cathie Wood’s ARK funds selling off their Kratos shares. Wood is famous for tolerating high price tags on growth stocks that most other institutional investors shy away from. The fact that her funds are selling KTOS could suggest that the stock’s valuation has gotten too high for even one of the most risk-tolerant investors on Wall Street.
Could New Policies Throw Cold Water on Kratos?
One of the wild cards in the defense industry at the moment is the recent announcement from President Donald Trump that his administration intends to curtail the use of dividends and stock buybacks by large, publicly traded defense contractors. These mechanisms, common as a means for contractors to reward shareholders out of the steady cash flows produced by their government contracts, appear to be drawing the administration’s ire for drawing away capital that could otherwise be used to expand production.
Kratos, which neither pays a dividend nor repurchases its shares, actually came out in support of the new policies as a means of prioritizing reinvestment. Although Kratos likely won’t find itself facing the same problems as defense contractors that return large amounts of cash to shareholders through these mechanisms, it could still face some headwinds.
To begin with, more restrictive policies around share buybacks could take the option of repurchasing shares off the table for Kratos, even if its stock becomes attractively undervalued in the future. With more stringent budget and timeline guidelines being implemented and greater pressure to invest in new manufacturing capacity, the defense industry as a whole could also see a period of lower margins ahead.
Is Kratos a Good Stock to Own?
With US defense spending focusing heavily on the advanced technologies that Kratos specializes in, the business could be in for several years of solid performance. Between management projecting revenue growth well into double-digit territory over the next couple of years, a decently large backlog and a strong pipeline of new bids and proposals to bring in business, Kratos seems to be situated to take full advantage of America’s push to invest in military modernization.
Unfortunately, Kratos still suffers from a valuation that gives it remarkably little room for error. On a 5-year expected basis, KTOS is still priced at over 40 times projected earnings growth. As such, the stock still looks quite expensive even after several years of strong growth are factored into its price.
With this in mind, KTOS currently looks like it may be a better hold than a buy. Though there’s little doubt that the business is performing well and could have substantial room for long-term growth as the US invests more heavily in drones, hypersonic systems and other cutting-edge technologies, the stock’s price appears a bit too high to buy at the moment. Investors may, however, want to watch KTOS for better entry points that would allow them to invest in an appealing business at a more reasonable price tag.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.