Defense stocks are making headlines amid a surge in global military activity and national security spending. The market is gearing up for a multiyear rearmament cycle, and defense companies' backlogs are growing substantially.
Two under-the-radar defense stocks that are poised for growth are Kratos (KTOS 8.86%) and Rocket Lab (RKLB 6.53%). While many investors focus on the big-name prime contractors, mid-tier companies are shaking up high-growth niches in the defense industry.
If you're looking to grow your portfolio, now may be the time to consider Kratos and Rocket Lab. But which one is the better buy today? Let's dive into the details and find out.
Image source: Getty Images.
Kratos is disrupting the defense industry with affordable technology
Kratos is a dedicated defense contractor with most of its business focused on national security. Last year, roughly 68% of its total revenue came from the U.S. government, including foreign military sales. The company primarily focuses on unmanned aerial systems, satellite ground stations, microwave electronics, and missile defense.
What makes Kratos appealing is that it is a disruptive mid-tier contractor that builds high-tech hardware at a lower cost than prime contractors such as Lockheed Martin or RTX. Kratos says that "affordability is a technology" and aims to be the first to market with cost-effective solutions. Kratos doesn't compete directly with prime contractors; it works as a close partner with companies like Northrop Grumman and GE Aerospace to integrate its hardware into broader systems.
NASDAQ: KTOS
Key Data Points
Last year, Kratos was awarded a $1.45 billion contract for the MACH-TB 2.0 program, which aims to be a testing sandbox for the Pentagon's hypersonic technologies. This contract is the largest in the company's history and a cornerstone of its expanding hypersonic business, which is projected to double revenue to approximately $400 million in 2026.
Another growing segment of its business is Unmanned Aerial Systems (UAS), where it manufactures the Valkyrie tactical drone, which has been selected as the first Collaborative Combat Aircraft under the U.S. Marine Corps MUX TACAIR program, serving as an unmanned partner for manned fighters like the F-35. Kratos is a key subcontractor with Northrop Grumman on the $231.5 million contract awarded in January.
Rocket Lab's evolution from a small launch provider to a U.S. defense contractor
Rocket Lab started as a commercial small-launch space company and has since expanded into a defense contractor for U.S. national security. Last December, the space company was awarded an $816 million prime contract to design, manufacture, and operate 18 satellites for the Space Development Agency's (SDA) Tracking Layer Tranche 3 program. These will be equipped with advanced missile-warning, tracking, and defense sensors, including Rocket Lab's Phoenix infrared sensor and StarLite space-protection sensors.
NASDAQ: RKLB
Key Data Points
The company has also developed a suborbital version of its Electron rocket, called Hypersonic Accelerator Suborbital Test Electron (HASTE). HASTE provides reliable, high-cadence flight test opportunities to advance hypersonic and suborbital system technology. Last year, the company completed three HASTE missions, which are viewed as a key national security initiative to support efforts such as the Golden Dome.
In addition, Rocket Lab's space systems segment is a growing part of the business as it becomes a vertically integrated space company. It is the only commercial provider producing both spacecraft and payloads in-house for the SDA's Tranche 3 Tracking Layer, giving it greater control over schedule and costs than competitors who must outsource their optics and payloads.
Which up-and-coming defense contractor is a better buy?
Analysts project Rocket Lab's 2028 non-GAAP (adjusted) earnings per share (EPS) to be around $0.29, giving it a valuation of 264 times those forward estimates, while Kratos is priced at 68 times its 2028 projected EPS of $1.34. Given the lofty valuations, both stocks are best suited for aggressive investors seeking growth. Choosing between the two depends on what you are looking to gain exposure to.
Rocket Lab is a diversified company that serves commercial customers and governments through its defense business. Beyond defense, it will look to launch its larger Neutron launch vehicle this year. The company is currently unprofitable, but investing in it is a bet on the growing space economy.
Kratos is a pure-play defense contractor, and its outlook for this year is bolstered by the hypersonic contract and the ramp-up of its Valkyrie drone. Investing in the stock can give you exposure to defense technologies such as drones and hypersonics. If I had to pick one stock today, I'd give Kratos a slight edge as it is currently profitable and cheaper on a forward earnings basis.
