Kratos Keeps Climbing After Q2, But Valuation Risk Looms

Key Points

• Kratos Defense & Security Solutions has been one of the top-performing stocks in the defense industry in 2025.
• The company crushed expectations in Q2, but its forward price-to-earnings (P/E) ratio now exceeds 100x.
• What is the outlook for Kratos, which just won a new multi-hundred-million-dollar government deal?

 

Since reporting Q2 2025 earnings, Kratos Defense & Security Solutions NASDAQ: KTOS has continued to be one of the most impressive defense stocks of the year.

Kratos shares are up approximately 17% after the firm released financials on Aug. 7, pushing the stock’s cumulative return to nearly 161% in 2025.

However, a key valuation metric has also ballooned over the past several weeks, raising concerns about whether shares are becoming overextended. Below, we’ll break down Kratos’s latest quarter and gain an updated outlook on the stock.

Kratos Beats Big in Q2, Wins $750 Million Deal

In Q2, Kratos saw its revenues rise to nearly $352 million, a growth rate of 17%. This was particularly notable for multiple reasons. First, the figure marked a continued acceleration in growth over the past several quarters.

The company’s revenue growth was just barely above 0% in Q3 2024, 3% in Q4 2024, and Kratos’s revenue was 9% in Q1 2025. Clearly, the firm’s ability to bring in higher sales has improved dramatically recently.

Kratos’s Q2 growth also blasted past Wall Street expectations of less than 2% growth. This sales beat also contributed to the company exceeding forecasts on adjusted earnings per share. The figure came in at 11 cents, compared to estimates of 9 cents.

The sales beat also helped the company increase its full-year 2025 revenue guidance to a midpoint of $1.30 billion, up from $1.275 billion previously.

Kratos also made several other announcements that bode well for its future sales. The firm won a government award for an opportunity called Poseidon. Poseidon has a total potential value of $750 million, and Kratos expects to be the only prime contractor on the deal.

The deal will likely take years to pay out, and production won’t ramp up until 2027. Still, its size shows Kratos's big growth opportunity. The $750 million figure is more than double the total revenue Kratos generated in Q2.

The company’s bid and proposal pipeline also increased to a record $13 billion; the value of deals that the company is going after has never been higher. Poseidon is just one example of the company’s ability to turn this potential into reality, providing further confidence that Kratos can execute on its massive pipeline.

Analysts See Limited Upside on Kratos’s Soaring Valuation

Overall, the MarketBeat consensus price target on Kratos is approximately $56 per share. Compared to the stock’s August 13 closing price, this figure implies significant downside potential of nearly 19%. However, analysts who updated their price targets on the stock after Kratos’s earnings are decidedly more bullish.

Among those analysts tracked by MarketBeat, the average price target is just over $70.

This target still only suggests a 2.3% upside in shares, but that is still significantly more encouraging than the deep downside implied by the consensus. Part of the valuation worries around Kratos stem from the stock’s soaring forward price-to-earnings (P/E) ratio.

Since June 30, Kratos’s forward P/E has moved from 86x to 109x, a nearly 27% increase. This signals that investors are willing to pay substantially more for each dollar of expected future earnings than they were before. However, there is one event in particular that helps justify this.

Hegseth’s Drone Push Boosts Investor Confidence

On July 10, U.S. Defense Secretary Pete Hegseth released his "Unleashing U.S. Military Drone Dominance" memo. Hegseth wants to accelerate the U.S. military’s use of low-cost drones, a key area of focus for Kratos. This increases the likelihood that Kratos’s solutions will see significant adoption from the U.S. government, making the company’s expected future earnings more likely to materialize.

As this likelihood rises, investors feel increasingly comfortable with paying more for future earnings. Benchmark analyst Josh Sullivan referenced Hegseth's memo on Kratos’s earnings call. He said the memo's emphasis on low-cost drones “obviously lines up nicely” with Kratos’s business model.

Overall, Kratos’s more than 100x forward P/E is certainly nothing to dismiss. The higher this ratio goes, the higher the downside risk becomes when the firm reports earnings in the future. If Kratos faces a big setback, shares could get hit hard.

However, the company has an incredible earnings track record. It has beaten adjusted EPS estimates in 12 out of the last 12 quarters and only missed sales estimates twice. In the long term, the company’s ability to win huge deals compared to its current revenues bodes well for the future of shares.