Autonomous drone warfare has crossed the threshold from experimental to indispensable. Ukraine proved that $500 FPV drones neutralize $5M tanks — a 10,000:1 cost asymmetry that permanently rewrites defense procurement logic. The U.S. DoD is now structurally pivoting toward distributed, autonomous, AI-enabled warfare.
Three converging forces make this sector investable in our 6-month window:
The bottleneck investing question: who controls the irreplaceable supply? Not who makes drones — who makes the engines, airframes, and propulsion systems at price points that enable mass deployment? That's where pricing power lives.
| Metric | KTOS | AVAV | ONDS |
|---|---|---|---|
| Price | $97.21 | $265.46 | $11.07 |
| Market Cap | $16.56B | $13.26B | $4.98B |
| 52-Week High | $134.00 | $417.86 | $15.28 |
| 52-Week Low | $23.90 | $102.25 | $0.57 |
| % Off 52w High | -27% | -36% | -28% |
| 50-Day MA | $93.31 | $283.81 | $10.44 |
| 200-Day MA | $70.42 | $267.68 | $5.89 |
| Price vs 50D | Above ✓ | Below ✗ | Above ✓ |
| Price vs 200D | +38% above | At MA (neutral) | +88% above |
| TTM Revenue | ~$1.32B | ~$1.95B | ~$48M |
| FY26 Rev Guide | $1.52–1.59B | $1.95–2.0B | $170–180M |
| Rev Growth | +15–20% organic | ~3% organic (9% ex-BH) | +260% (M&A driven) |
| Backlog | $1.48B | $3.9B (awards) | $65.3M |
| Bid Pipeline | $13.5B | N/A | N/A |
| Profitability | GAAP profitable (Q3) | Net loss ($38M guide) | Net loss |
| P/S (TTM) | ~12.5x | ~6.8x | ~104x |
| P/S (Forward) | ~10.5x | ~6.7x | ~28x |
| Dilution Risk | Low — no buybacks/divs | Low | Extreme — 253% YoY |
| Next Earnings | Feb 23 (Mon!) | Mar 3–10 | Mar 11–18 |
Kratos is the only company mass-producing affordable, jet-powered autonomous combat drones. The XQ-58A Valkyrie — flying since 2019, now a Marine Corps program of record via Northrop Grumman — is exactly what every military on earth wants: sophisticated enough for combat, expendable enough for mass deployment, at $2-3M per unit vs $80M+ for manned fighters.
But drones aren't the real moat. The moat is propulsion. Kratos Turbine Technologies builds the turbojet engines for low-cost cruise missiles and drones. Zeus solid rocket motors power hypersonic test vehicles and tactical missiles. When the CEO says the rocket business could become their largest division in 2-3 years, he's describing the picks-and-shovels position in autonomous warfare. Every program — AVAV's, ONDS's, Northrop's, Airbus's — needs propulsion systems, and Kratos is one of the only affordable sources.
Q3 2025 delivered: Revenue $347.6M (+23.7% organic, crushing the $322M estimate). Net income $8.7M (near-tripled YoY). Bookings $414M (1.2x book-to-bill). Backlog $1.48B. $13.5B bid pipeline. Guided FY26 to 15-20% organic growth with 100bps EBITDA expansion, FY27 to 18-23% with another 100bps. Airbus licensed Valkyrie for Europe. Taiwan tested it. Shield AI's Hivemind autonomy OS runs on it with 15,000+ flight hours.
Risks: Unmanned Systems segment has suppressed margins (7.3% EBITDA) from legacy fixed-price contracts negotiated in 2020-21 that can't be renegotiated for ~2 years. FCF negative ($95-105M use in FY25) due to working capital pre-funding. Valuation at ~12.5x TTM revenue is rich — but justified if 15-20% organic growth + margin expansion materializes.
Bottleneck thesis: Every military drone program in the West needs Kratos airframes, engines, or rocket motors. They're the TSMC of expendable combat drones — the supplier everyone must go through. Physical supply constraint with 2-3 year replication lag.
AeroVironment is the battle-proven titan. Switchblade loitering munitions are standard-issue in Ukraine. Puma and Raven ISR platforms deployed across U.S. and allied forces. The $7.6B BlueHalo acquisition transformed AVAV from tactical drone maker into multi-domain defense prime — adding space, cyber, directed energy, and electronic warfare across a 12-state manufacturing footprint.
Q2 FY26: Record revenue $472.5M (+151% YoY). Bookings hit $1.4B record. Total contract awards $3.5B. FY26 guidance $1.95-2.0B with 93% visibility from firm orders. Five-year $874M Army IDIQ. $75M Air Force biotech task order. KeyBanc PT raised to $330.
The problem: BlueHalo integration is compressing everything. Gross margin collapsed 39% → 22%. Adjusted EPS $0.44 missed the $0.79 estimate by 44%. FY26 guides to net loss of $38-30M despite $2B revenue. Organic growth ex-BlueHalo was only ~9%. At ~75-80x forward adjusted P/E, the stock prices perfection on execution AVAV hasn't yet demonstrated.
Bull case: The backlog visibility is extraordinary — 93% of revenue guided. As integration matures through FY27, margin recovery creates re-rating catalyst. $3.5B in awards gives multi-year revenue line of sight. The floor is high: $200+ even in a bear scenario (proven prime at 5x sales).
Ondas executed a radical 24-month transformation from niche radio company to autonomous defense platform. Q3 2025 revenue up 580% YoY to $10.1M. FY25 revenue $48-50M. FY26 target raised to $170-180M (+260%). Backlog surged 180% to $65.3M in seven weeks. Through acquisitions of American Robotics, Airobotics, Iron Drone, Sentrycs, Apeiro Motion, and Roboteam, ONDS assembled a complete System-of-Systems platform.
Catalysts: Optimus drone received DCMA Blue List approval (Jan 28). Won prime contractor tender for autonomous border protection deploying "thousands of drones." Gen. Patrick Huston appointed COO. $1.5B+ pro-forma cash post-$1B offering gives extraordinary M&A firepower.
The problem: $5B market cap on $48M revenue = 104x TTM P/S. Shares outstanding ballooned 253% to ~450M+ diluted. Adjusted EBITDA loss widened to $8.8M in Q3 despite revenue surge. Q3 bookings-to-revenue barely above 1.0 — inadequate for 260% growth guidance. The $170-180M target requires integrating six acquisitions simultaneously while scaling production, securing new contracts, and converting a $65M backlog that covers less than 40% of guided revenue. Ondas Networks (rail wireless) remains pre-revenue after years of development.
Framework classification: Momentum trade with option-like payoff structure. No structural moat — competitive advantage is "we acquired a lot of companies fast." If execution stumbles, floor is $3-5 (sub-$2B mkt cap on pre-profit fundamentals).
| Factor | Wt | KTOS | AVAV | ONDS | Key Differentiator |
|---|---|---|---|---|---|
| Moat Durability | 30% | 80 | 78 | 45 | KTOS: Only affordable jet drone + propulsion supplier. Physical manufacturing moat. AVAV: 50yr DoD relationships, battle-proven platforms. ONDS: Assembled via M&A, unproven integration. |
| Catalyst Runway | 25% | 82 | 62 | 75 | KTOS: Q4 ER Feb 23(!), Drone Dominance award, turbojet LRIP contracts Q2-Q3, Orbit acq closing, Valkyrie production ramp, Taiwan expansion — 6+ catalysts, mostly new information. AVAV: Q3 ER Mar 10, primarily confirmation. ONDS: FY25 ER, border contract milestones. |
| Supply-Demand Trajectory | 20% | 75 | 60 | 65 | KTOS: Demand accelerating (budget expansion, allied procurement). Supply constrained — can't build Valkyries/engines fast enough. Prometheus facility expanding. AVAV: Demand strong but supply-side (production capacity) is a known quantity. ONDS: Demand strong but competitive landscape crowded (RCAT, DPRO). |
| Edge Decay Rate | 15% | 58 | 50 | 60 | KTOS: Widely followed (16 analysts, Strong Buy) but propulsion bottleneck angle is less consensus. Stock up 280% in 1yr = partial pricing. AVAV: "Drone defense leader" is full consensus. ONDS: Transformation story emerging but coverage increasing fast. |
| Regime Alignment | 10% | 78 | 72 | 72 | All benefit from defense budget expansion. KTOS gets extra points: Trump's "no buybacks/dividends until production ramps" — KTOS already does neither. CEO DeMarco: "not financial engineering." Perfect policy alignment. MTCR easing benefits KTOS international sales. |
ALPHA_v2 = (Moat × 0.30) + (Catalyst × 0.25) + (S/D × 0.20) + (Edge × 0.15) + (Regime × 0.10)
KTOS: (80 × 0.30) + (82 × 0.25) + (75 × 0.20) + (58 × 0.15) + (78 × 0.10) = 24.0 + 20.5 + 15.0 + 8.7 + 7.8 = 72.2
AVAV: (78 × 0.30) + (62 × 0.25) + (60 × 0.20) + (50 × 0.15) + (72 × 0.10) = 23.4 + 15.5 + 12.0 + 7.5 + 7.2 = 63.9
ONDS: (45 × 0.30) + (75 × 0.25) + (65 × 0.20) + (60 × 0.15) + (72 × 0.10) = 13.5 + 18.75 + 13.0 + 9.0 + 7.2 = 59.2
| Scenario | Price | Return | P |
|---|---|---|---|
| Bull | $135–150 | +39–54% | 25% |
| Base | $105–125 | +8–29% | 40% |
| Bear | $75–90 | -7–23% | 25% |
| Crash | $55–65 | -33–43% | 10% |
EV: +13%. Tightest downside distribution. Floor ~$65 (proven revenue base at 4x sales). Best risk-adjusted.
| Scenario | Price | Return | P |
|---|---|---|---|
| Bull | $350–400 | +32–51% | 25% |
| Base | $290–330 | +9–24% | 40% |
| Bear | $200–240 | -10–25% | 25% |
| Crash | $150–180 | -32–43% | 10% |
EV: +12%. Solid floor from backlog visibility. Integration execution is the swing variable.
| Scenario | Price | Return | P |
|---|---|---|---|
| Bull | $18–22 | +63–99% | 20% |
| Base | $12–15 | +8–35% | 30% |
| Bear | $7–9 | -19–37% | 35% |
| Crash | $3–5 | -55–73% | 15% |
EV: +3%. Widest distribution. Explosive upside but fat left tail. Bear+crash probability: 50%. Lottery ticket profile.
ENTRY $90–97 (current zone — earnings Feb 23 is imminent catalyst)
TARGET $125–140 (+29–44%)
STOP $75 (-23%)
R:R Ratio: 1.7:1 to 2.2:1
Position Size: 2–3% ($150–230K). MEDIUM conviction.
Entry Strategy: Two options — (1) small starter before Feb 23 ER to capture potential upside surprise, add on strength confirmation, or (2) wait for post-ER digestion if it gaps up. Do NOT chase a gap above $110.
Why #1: Bottleneck supplier (propulsion) + profitable + densest catalyst calendar + organic growth (no M&A integration risk) + Trump policy alignment + reasonable valuation relative to growth.
ENTRY $245–265 (post-Q3 ER dip below $260 preferred)
TARGET $340–380 (+28–43%)
STOP $215 (-19%)
R:R Ratio: 1.8:1 to 2.3:1
Position Size: 1.5–2.5% ($115–190K). MEDIUM conviction.
Entry Strategy: Wait for Q3 FY26 earnings (Mar 3–10). Margin improvement = add. Another miss = pass. The thesis is margin recovery — need evidence, not hope.
ENTRY $8.50–10.50 (need pullback to 50D MA for acceptable R:R)
TARGET $16–20 (+45–80%)
STOP $7.00 (-37%)
R:R Ratio: 1.5:1 to 2.5:1
Position Size: 0.5–1% max ($40–75K). LOW conviction. Size for total loss tolerance.
Entry Strategy: Only on pullback. Do NOT buy at $11+. Wait for post-earnings volatility (Mar 11–18) to establish at better level. This is a call option on defense drone rollup success, not an equity position.
Apply the Apex framework lens that generates alpha across Phase 1 infrastructure:
AVAV is a bigger company with a deeper backlog — but it's an integrator, not a bottleneck. ONDS is growing faster — but it's an acquirer, not a manufacturer. KTOS is the supplier both of them ultimately need. That's the bottleneck.
| Date | Event | Ticker | Impact |
|---|---|---|---|
| Feb 23 ★ | KTOS Q4/FY25 Earnings | KTOS | Immediate catalyst. Rev beat + FY26 guide confirmation + margin trajectory. Biggest near-term event in the sector. |
| Mar 3–10 | AVAV Q3 FY26 Earnings | AVAV | BlueHalo integration margin check. 13.6% implied move priced. Margin recovery = re-rate. |
| Mar 11–18 | ONDS Q4 2025 / FY25 Earnings | ONDS | Revenue validation vs $27–29M Q4 guide. FY26 guidance confirmation. |
| Mar 17–18 | FOMC Meeting | ALL | Rate path clarity. Defense less rate-sensitive but sentiment matters. |
| Q2 2026 | KTOS turbojet LRIP contracts | KTOS | 2 initial production contracts expected. Volume = margin inflection signal. |
| Q2 2026 | KTOS Orbit Communications closes | KTOS | $356M acquisition adds satellite comms for UAS. Immediately accretive. |
| H1 2026 | Defense budget appropriations | ALL | Drone Dominance, Golden Dome, Replicator program line items. |
The sector is real. The budget tailwinds are structural. The question for Apex is allocation discipline — this competes for the Phase 4 / adjacent sleeve, not core Phase 1-3 capital. KTOS earnings on Monday (Feb 23) is the sector's defining catalyst. Position before or immediately after, depending on risk appetite. Everything else follows from that print.