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Why Kratos and AeroVironment Are Suddenly Moving Like Tech Stocks
Authored by Jeffrey Neal Johnson. Article Published: 12/25/2025.
Article Highlights
- Kratos has successfully transitioned from experimental testing to full-scale mass production of hypersonic systems and tactical drones.
- New federal regulations banning foreign competitors have created a protected domestic market for AeroVironment and its commercial drone systems.
- The defense market is rewarding companies that provide affordable, consumable systems that generate recurring revenue streams, such as software.
For decades, the defense sector was a safe harbor for conservative investors. Companies like Lockheed Martin (NYSE: LMT) and General Dynamics (NYSE: GD) were treated as bond proxies—stocks offering slow growth, reliable dividends and low volatility. They were the industrial giants many investors bought and held for decades to preserve capital.
But 2025 has changed that paradigm. A global shift toward asymmetric warfare—where relatively inexpensive drones can disable costly armored vehicles—has forced the Pentagon to rethink procurement. That strategic pivot has separated agile, tech-focused mid-cap companies from their slower-moving peers. Investors are increasingly valuing these firms on growth and technological disruption rather than only on cash flow and dividends.
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Discover how to invest in the fund Trump uses to collect this income >>Leading the charge are Kratos Defense & Security Solutions (NASDAQ: KTOS) and AeroVironment (NASDAQ: AVAV). Both have moved from niche experimental players to central pillars of national security, creating a new defense-tech asset class—with charts that resemble Silicon Valley software stocks more than traditional industrial manufacturers.
The Economics of Attrition: A New Model
To understand these moves, investors need to grasp a key military concept: attritable systems.
Historically, defense spending centered on legacy platforms such as aircraft carriers and fighter jets designed to last for decades. Those programs generate revenue through long-term maintenance contracts. Modern conflict, however, requires assets that are capable enough to complete a mission but inexpensive enough to be lost in combat without breaking the budget. That is the essence of attritable.
For investors, this shift changes the sector's fundamental business model. The market is moving from a Maintenance Model to a Consumption Model.
- Legacy Model: A fighter jet is sold once and then supported for 40 years. Volume is low; margins are steady.
- Attritable Model: A drone or loitering munition is sold, used in combat and destroyed. The customer immediately buys another. Volume is high; revenue is recurring.
That creates a cycle of high-volume sales more like a commodities business or a software licensing model. The market is placing a premium on companies that can deliver these systems at scale, driving the valuation expansion we see today.
Kratos Defense: Validating the Science Project
Skeptics long dismissed Kratos Defense & Security Solutions as a collection of science projects—impressive experimental tech lacking steady production contracts. In 2025, Kratos began to quiet those critics by moving from prototype testing to mass manufacturing.
The market reacted strongly, driving Kratos' stock price up more than 200% year-to-date. That surge is underpinned by concrete federal commitments that provide clearer long-term revenue visibility.
The Hypersonic Anchor
In January 2025, Kratos secured the $1.45 billion MACH-TB 2.0 contract, solidifying its role as a primary provider of hypersonic testbed systems. The company also successfully scaled its Zeus solid rocket motor production line.
By becoming a merchant supplier of these motors, Kratos is no longer only building its own systems; it is selling the engines that will power the broader hypersonic industry.
The Valkyrie Graduation
Perhaps the most meaningful milestone was the U.S. Marine Corps' designation of the XQ-58A Valkyrie as a Program of Record. In government contracting, moving from an experimental budget line to a Program of Record is the gold standard, guaranteeing recurring funding in the federal budget for years to come.
Wall Street has noticed. Analysts—including KeyBanc—recently upgraded the stock to Overweight, signaling to institutional investors that Kratos has transitioned from a speculative bet to a foundational defense holding.
AeroVironment: The Regulatory Moat
While Kratos is winning on production scaling, AeroVironment is leveraging a rapidly changing regulatory landscape.
As the market leader in loitering munitions—commonly called "suicide drones"—AeroVironment has reinforced its position through acquisitions and favorable government policy.
The most immediate catalyst arrived on Dec. 22, 2025.
The Federal Communications Commission, acting on mandates from the 2025 National Defense Authorization Act (NDAA), effectively banned the authorization of new drones from certain foreign competitors, specifically targeting Chinese manufacturers.
That regulatory action clears the field for AeroVironment. By restricting imports of competing models, the government has created a sizable regulatory moat around AeroVironment's commercial and tactical business lines, effectively protecting its domestic market share.
The BlueHalo Expansion
Beyond regulation, AeroVironment is aggressively pursuing growth. The company reported a 151% year-over-year revenue increase, reaching a record $472.5 million in its most recent quarter. That surge was further bolstered by the strategic $4.1 billion acquisition of BlueHalo in May 2025.
Through that deal, AeroVironment expanded beyond drones into directed energy (lasers) and space technologies. While the company posted a net loss recently due to integration costs, its backlog tells a different story: AeroVironment secured an $874 million IDIQ (Indefinite Delivery, Indefinite Quantity) contract in December 2025, indicating global customers are lining up for its systems faster than they can be built.
The Price of Speed: Understanding the Volatility
The growth thesis is compelling, but investors should acknowledge that the steady safety once associated with traditional defense stocks is gone. By trading more like technology names, Kratos and AeroVironment also inherit tech-like volatility.
Both companies currently trade at higher valuation multiples than legacy primes such as Northrop Grumman (NYSE: NOC). That implies the market has priced in a high degree of future execution. Any delay in Valkyrie production or setbacks in the BlueHalo integration could produce sharp, short-term pullbacks, as seen in AeroVironment's post-earnings dip earlier this month.
For investors with higher risk tolerance, those pullbacks can present entry opportunities rather than exit signals. The demand for speed, autonomy and attritable mass is not a fleeting trend; it is becoming doctrine.
The New Defense Playbook
The evidence suggests the defense sector is undergoing a structural split. On one side are the traditional primes, offering stability and yield. On the other are disruptors such as Kratos and AeroVironment, offering velocity and expansion.
These companies represent the software-like layer of national defense: adaptable, scalable and increasingly essential for modern combat. While they carry higher volatility than their industrial predecessors, AeroVironment's regulatory protection and Kratos' production scaling create a growth trajectory rarely seen in this industry.
The market's message in late 2025 is clear: modern warfare prizes speed, and investors are rewarding the companies that can deliver it.
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