We recently compiled a list of the 8 Best Drone Stocks to Buy Now. In this article, we are going to take a look at where Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) stands against the other drone stocks.
The term “drone” refers to any remotely piloted aircraft (RPA), which can vary in form and autonomy, either controlled by a human pilot or capable of fully autonomous flights. In 2005, the United States Department of Defense (DoD) and the Federal Aviation Administration (FAA) adopted the term “unmanned aircraft system” (UAS) to describe these aerial drones. This terminology was later adopted by other governmental agencies globally, highlighting the importance of considering various system components rather than focusing solely on the aircraft for regulatory development. The rapid evolution of drones began with the advancement of defense technologies, enabling the remote piloting of aircraft equipped with both weaponized and non-weaponized systems. These larger military drones, often weighing several kilograms, are crucial for deployment in environments too dangerous for human pilots. Today, smaller drones are employed by various government agencies for a range of operations, including precision agriculture mapping and surveillance.
The Russia-Ukraine war, which began in February 2022, has driven a significant increase in demand for drones, as both militaries employ them for various operations, including intelligence, surveillance, reconnaissance, and target acquisition support. The unprecedented scale of Unmanned aerial vehicles (UAVs) deployment caught both Ukrainian and Russian forces unprepared for such extensive use. However, both militaries have rapidly advanced their drone technology, frequently modernizing and adapting these systems directly on the front lines. In a statement this past year, Anton Gerashchenko, an adviser to Ukraine’s Minister of Internal Affairs, stated “This war is a war of drones; they are the super weapon here.” With advancements in artificial intelligence (AI) and increasing legislative support, the drone market seems poised for significant growth.
Another trend involves the development of specialized drones tailored for specific industries. These industry-specific drones are equipped with sensors, cameras, and software designed to meet the unique requirements of sectors such as agriculture, construction, and inspection. These ‘Consumer’ and ‘Recreational’ drones have become a common part of daily life, particularly among drone hobbyists. As of April of this year, over 780,000 drones were reportedly registered with the Federal Aviation Administration (FAA), with 375,226 classified as commercial and 400,858 as recreational.
What Does the Market Think About the Future of Drones?
The U.S. commercial drone market was valued at $5.85 billion in 2023 and is projected to reach approximately $14.11 billion by 2033, growing at a compound annual growth rate (CAGR) of 9.2% from 2024 to 2033. In 2023, the rotary blade segment held the largest market share at around 81%, while the hybrid segment is anticipated to experience the fastest growth, with a CAGR of over 11% during the forecast period.
On the other hand, a report by MarkNtel Advisors states that the global military drone market was valued at approximately $20.21 billion in 2023 and is projected to grow at a CAGR of about 12.21% from 2024 to 2030. This rapid growth is driven by the widespread adoption of Extended Visual Line of Sight (EVLOS) UAVs for long-range missions focused on data collection, battle management, and electronic warfare. A notable example of this technology came in the form of General Atomics’ testing of advanced datalink and avionics enhancements for the MQ-1C Gray Eagle Extended Range (GE-ER) drone back in 2022.
Our Methodology
To compile the list of the best drone stocks to invest in, we first sifted through ETFs and online rankings to come up with a preliminary list. Next, we scanned Insider Monkey’s database of 920 hedge funds and selected the 8 drone stocks that were the most widely held by institutional investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple, our research has shown that we can outperform the market by imitating the top stock picks of best hedge funds. Our quarterly newsletter’s strategy picks 14 small and large-caps every quarter and it has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A technician in a laboratory carrying out research and development of microwave electronics.
Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS)
Number of Hedge Fund Holders: 24
Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) is a diversified American defense stock involved in various technologies including hypersonic travel, engine propulsion, and satellite communications. Renowned for its advanced defense technology, the company is making notable strides in the drone industry, particularly within the military sector. Earlier this April, the company marked a key milestone by completing the initial phase of the U.S. Marine Corps’ Penetrating Affordable Autonomous Collaborative Killer – Portfolio (PAACK-P) program. This achievement was highlighted by a successful demonstration conducted by its Unmanned Systems Division for the XQ-58 Valkyrie drone. The demonstration followed a $22.9 million contract modification awarded in December of last year for further engineering development and flight test demonstrations.
In its first quarter, Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) nearly broke even, with revenues growing by 20% year-over-year. The defense technology contractor, focusing more on military drones, reported a net income of $1.3 million, equivalent to one cent per share, on revenue totaling $277.2 million for the quarter.
During the first week of June, RBC Capital raised its price target for Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) to $24.00 from the previous $23.00, while reiterating its Outperform rating on the stock. This adjustment comes after a meeting with Kratos’ CEO and CFO at the company’s San Diego headquarters, where RBC Capital analysts discussed the company’s first-quarter results for 2024 and the positive outlook for the remainder of the year. The discussions highlighted the air defense business as a key area experiencing significant growth momentum.
As of the end of the first quarter of 2024, Insider Monkey’s polling of 919 hedge funds showed that 24 of them were shareholders of the firm. The largest hedge fund investor in Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) is Catherine D. Wood’s ARK Investment Management, which holds a stake valued at $101.2 million.
Overall KTOS ranks 7th on our list of the best drone stocks to buy. You can visit 8 Best Drone Stocks to Buy Now to see the other drone stocks that are on hedge funds’ radar. While we acknowledge the potential of KTOS as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than KTOS but that trades at less than 5 times its earnings, check out our report about the cheapest AI Stock.
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Disclosure: None. This article is originally published at Insider Monkey.
