Drone makers Aerovironment (AVAV) and Kratos Defense (KTOS) certainly seem to have very bright futures ahead of them, as both have landed major deals from the Pentagon in the last year, both firms have integrated advanced technologies into their products, and drones have become a major part of warfare. Moreover, geopolitical tensions are generally high and rising in much of the world, causing many countries to raise their defense spending meaningfully. And President Donald Trump is asking Congress to increase defense spending by about 50% in fiscal 2027, while Defense Secretary Pete Hegseth is clearly a big fan of drones.
But both AVAV stock and KTOS stock have extremely high valuations, partly due to recent crises that have dominated the headlines in recent weeks.
As the attention paid to these crises ebbs and they are resolved, the shares of both Aerovironment and Kratos could very well retreat meaningfully. As a result, I believe that Cathie Wood’s decision to trim her ETFs’ holdings of AVAV stock and KTOS stock was the right move, and I think that retail investors should follow her lead. Sometimes profit taking is a smart move, and this is one of those times.
Both firms are leading makers of military drones. In Aerovironment’s fiscal second quarter which ended on Nov. 1, its revenue advanced 4% versus the same quarter a year earlier to $472.5 million, while its net cash flow sank 50.6% year-over-year to $318.57 million. The name has a forward price-earnings ratio of 110 times and a market capitalization of nearly $19 billion.
In the third quarter, Kratos’ sales dropped 1% versus the same period a year earlier to $347.6 million, but its net income rose 200% year-over-year to $8.7 million. The stock has a forward price-earnings ratio of 220 times and a market capitalization of $21 billion.
In September, AeroVironment reported that it had received a contract worth nearly $240 million from the Pentagon. The agreement calls for the firm to develop “long-haul space laser communication terminals to an unnamed customer in the next three and a half years.” And the following month, the company noted that it would create anti-electromagnetic spectrum (EMS) products for the Air Force and carry out R&D into anti-EMS initiatives under the terms of a $246 million agreement. What’s more, AVAV recently obtained a deal from the Army involving autonomous technology. Further, in the wake of the company’s acquisition of Blue Halo, it looks well-positioned to facilitate America’s forays into space and the country’s huge, anti-missile initiative, Golden Dome.
