Drone manufacturers Aerovironment and Kratos Defense have secured significant contracts from the Pentagon in the past year, integrating advanced technologies into their products as drones become increasingly central to modern warfare.
Both companies reported recent financial results. Aerovironment's revenue for the fiscal second quarter ending November 1 reached $472.5 million, a 4% increase year-over-year, though net cash flow declined 50.6% to $318.57 million. Kratos saw third-quarter sales dip 1% to $347.6 million, but net income jumped 200% to $8.7 million.
In September, Aerovironment announced a nearly $240 million Pentagon contract to develop long-haul space laser communication terminals. The following month, the company noted a $246 million agreement to create anti-electromagnetic spectrum products for the Air Force and conduct related research. The firm also recently obtained an Army deal involving autonomous technology and, following its acquisition of Blue Halo, appears positioned to support U.S. space initiatives and the Golden Dome anti-missile program.
Kratos convinced the U.S. Marines to designate its Valkyrie drone as a program of record, and its satellite offerings may be incorporated into Golden Dome. Overseas, the company is partnering with Korea Aerospace Industries to develop AI-enabled manned-unmanned teaming systems. In October, Kratos secured a potential $175 million deal with the U.S. Navy to provide missile defense and integrated air and missile warfare capabilities for radar systems.
President Donald Trump recently stated he will ask Congress to approve a $1.5 trillion defense budget for fiscal 2027, representing a roughly 50% increase from the current expected $1 trillion plan. Defense Secretary Pete Hegseth, who is seeking over 300,000 drones, has expressed strong support for the aircraft.
Geopolitical tensions remain elevated globally, with recent conflicts involving Iran, European concerns about Russia, and regional worries about China in East Asia contributing to increased defense spending worldwide.
Between January 2 and January 14, Aerovironment stock rose 49% and Kratos stock gained 53%. These increases coincided with crises in Venezuela and Iran, including a reported U.S. invasion of Venezuela on January 2 that involved drone use. However, attention to these events appears to be waning, with the Venezuela strike fading from investor focus and indications that the U.S. may not strike Iran.
Both stocks carry high valuations, with Aerovironment trading at a forward price-earnings ratio of 110 times and a market capitalization near $19 billion, while Kratos has a forward P/E of 220 times and a $21 billion market cap. Investor Cathie Wood recently reduced her ETFs' holdings in both companies, a move some suggest retail investors might consider as profit-taking.