Kratos Defense Stock Rockets 45% On Contract Win And Budget Expansion—But Valuation Concerns Loom

The Rally’s Reality Check

Kratos Defense & Security Solutions (NASDAQ: KTOS) experienced a dramatic 45% weekly surge driven by three converging factors: a freshly secured Marine Corps contract, expansive U.S. defense budget proposals for 2027, and heightened geopolitical tensions. While the headlines are bullish, the underlying valuation tells a different story.

What’s Actually Driving The Move

This week proved pivotal for defense contractors broadly. Following international developments and announcements of a proposed defense budget escalation to $1.5 trillion (up from $1 trillion in 2026), investors rotated heavily into aerospace and defense names. For Kratos specifically, the catalyst was a newly awarded contract involving Northrup Grumman to develop unmanned aerial systems designed to operate alongside manned platforms like the F-35.

The company’s core competency—autonomous drone systems and satellite communication infrastructure—positions it squarely in the path of emerging warfare paradigms. Last quarter alone demonstrated this momentum: revenue climbed 26% year-over-year, with management guiding for 15%-20% growth in 2026 and 18%-23% in 2027.

The Valuation Problem Nobody’s Discussing

Here’s where the story unravels. Kratos now carries a $19 billion market valuation while generating just $1.3 billion in annual revenue. This yields a price-to-earnings multiple exceeding 900—a figure that defies fundamental justification, even for a high-growth defense supplier.

Government contracting inherently operates under compressed margin structures, limiting pricing power. Kratos competes in this margin-constrained environment, meaning revenue growth doesn’t automatically translate to proportional earnings expansion. When comparing the stock’s current price relative to revenue multiples against peer contractors, Kratos trades at a premium that growth alone cannot justify.

The Investment Verdict

The post-rally valuation makes Kratos an unattractive entry point today. While the business narrative remains compelling—defense spending expansion, unmanned systems adoption, and secured contracts all support long-term revenue trajectory—current share pricing has gotten ahead of fundamental value creation. Waiting for a pullback before initiating or adding positions remains the prudent approach.

The real winner in expanding defense budgets may be less obvious candidates trading at more rational multiples. Kratos has already had its run; buyers today are buying momentum rather than margin of safety.