Kratos Defense Surge: Defense Budget Tailwinds vs. Valuation Concerns

The defense sector just had one hell of a week, and Kratos Defense & Security Solutions (NASDAQ: KTOS) was the standout performer—up roughly 45% as bullish sentiment swept through the space.

What’s Driving the Rally?

The catalyst isn’t hard to spot. The U.S. government unveiled plans for a substantial defense budget expansion in 2027, potentially reaching $1.5 trillion (compared to $1 trillion previously allocated). This kind of spending increase typically benefits defense contractors heavily, especially those focused on cutting-edge technology like unmanned systems.

Kratos also clinched a new contract this week with the U.S. Marine Corps to develop advanced unmanned aerial systems designed to operate alongside manned fighter aircraft, including the F-35. For a company specializing in drone technology and satellite communication systems, this is exactly the kind of win that fuels investor optimism.

Add to that recent geopolitical tensions and ongoing military operations, and you’ve got the perfect storm for defense stocks to rally hard.

The Growth Story Looks Real

On paper, Kratos has the fundamentals to back up the hype. Last quarter, revenue climbed 26% year-over-year. The company is projecting 15%-20% growth for 2026 and 18%-23% for 2027. For a government contractor, these aren’t just solid numbers—they’re exceptional.

The company operates in a space where demand is structural. Unmanned systems are the future of modern warfare, and Kratos sits at the forefront of that shift alongside the U.S. government’s desire to upgrade its defense capabilities.

But Here’s the Catch

After this week’s 45% jump, the stock now carries a market capitalization of $19 billion against roughly $1.3 billion in annual revenue. Translation: that’s an extremely premium valuation by any measure, particularly when you factor in the typical low-margin economics of government contracts.

The P/E ratio has swelled to over 900—a number that should make any value-focused investor pause. Sure, you could argue Kratos is growing faster than peers, but government contracts come with mandated profit margins that cap upside.

The Real Question

Is this a long-term opportunity or a short-term trade that’s already overextended? The growth fundamentals are legitimately strong, and defense spending tailwinds appear structural. But paying this much for a low-margin business—even one with solid growth—feels like catching a falling knife after a 45% rip.

Investors should probably wait for either a meaningful pullback or more concrete proof that Kratos can sustain hypergrowth while maintaining healthy margins. The story isn’t going away, but the price just got a lot less attractive.