Kratos Defense Stock Surges 45% Amid Pentagon's Aggressive 2027 Budget Plan

Defense stocks are in the spotlight this week, with Kratos Defense & Security Solutions (NASDAQ: KTOS) leading the charge—its shares climbed 45% following a combination of geopolitical developments and major contract announcements.

Why The Rally?

The surge is driven by three main catalysts. First, the U.S. government unveiled a proposed defense budget of $1.5 trillion for 2027, a significant jump from the current $1 trillion. This spending increase signals substantial investments in cutting-edge military technologies, an area where Kratos specializes.

Second, this week brought concrete validation of that demand: Kratos Defense secured a meaningful contract with the U.S. Marine Corps to develop unmanned aerial systems that will operate alongside crewed aircraft like the F-35. The company is collaborating with major defense partners to deliver next-generation autonomous platforms.

Third, recent geopolitical tensions—including U.S. military operations in Venezuela—have reinforced investor confidence in defense-sector growth.

The Growth Story Behind The Stock

Kratos Defense & Security Solutions manufactures unmanned drones engineered to fly in tandem with tactical aircraft, plus advanced space and satellite communication infrastructure. The unmanned systems are poised to become central to modern combat operations.

Financially, the company shows solid momentum. Last quarter, revenue grew 26% year-over-year, with management projecting 15%-20% growth in 2026 and 18%-23% in 2027. These are respectable numbers within the defense sector.

The Valuation Red Flag

Here’s where caution is warranted. After this week’s rally, Kratos Defense now trades at a $19 billion market cap against just $1.3 billion in annual revenue. The stock’s price-to-earnings ratio has ballooned to over 900—an extreme multiple by any measure.

While growth rates appear attractive, government defense contracts typically operate on thin, regulated margins. This structural reality limits how much profit can actually flow to shareholders. Comparing Kratos to peers reveals the stock commands a significant premium, even accounting for its faster growth trajectory.

Investment Verdict

The fundamentals deserve respect—new contracts, rising budgets, and a captive government customer base create a compelling long-term narrative. Yet the current valuation has already priced in much of this optimism and more. At a P/E ratio approaching 1,000, the risk-reward profile has shifted sharply against new buyers.

The prudent move is to wait. Market dislocations often provide better entry points for high-quality companies, and Kratos Defense & Security Solutions may deliver exactly that opportunity once sentiment normalizes.