The U.S. government appears set to divert some of the billions in funding traditionally earmarked for fighter planes to drone manufacturers, and investors are excited about the opportunity. Shares of Kratos Defense & Security (KTOS -1.67%) traded up 13% as of 11 a.m. ET following a Pentagon memo stressing the need for more advanced uncrewed systems.
Image source: Kratos Defense & Security.
Drones in the spotlight
Kratos Defense has been one of the more volatile stocks in the defense sector. The company has a steady business making electronics systems and target practice drones for the U.S. military, but investors have been more excited about the potential for its more advanced developments.
Kratos has developed a number of "loyal wingman" drones designed to carry sophisticated weapons into battle alongside piloted F-35s, boosting firepower, confusing antiaircraft systems, and improving pilot survivability. One such design, the Valkyrie, has been in testing with the Air Force for years, but so far has not led to a full-production order.
On Friday, Secretary of Defense Peter Hegseth issued two memos calling for the U.S. government to prioritize drone development in order to keep pace with Russia and China. Though the memos do not speak of Kratos or any vendor specifically, investors are understandably reading into the memo that it could be good news for programs including the Valkyrie and others that Kratos has in its pipeline.
Is Kratos Defense stock a buy?
Kratos shares are a near-double so far in 2025, and up 240% over the past five years. Based on the current book of business, the stock looks expensive for a defense stock. And after years of talk about an order without a signed contract, investors have every right to be skeptical.
If the Valkyrie or a similar Kratos drone joins the Air Force fleet, the stock still has a lot of room to run. Investors buying in today need to understand the risks involved and make sure to keep this stock to a small part of a well-diversified portfolio.
