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Palantir's Alex Karp was apparently spotted in Israel today, and is now expected to become the first major investor in a new defense company being created by Ukraine's former defense minister, who was fired in July. So what's going on here, how can you play on this, and does Kratos ( ticker symbol: KTOS) have anything to do with it all ?
Well, let's try to put it all together . First, according to the Kyiv Independent, Ukraine's former defense minister is offering the United States drone production technology in exchange for Patriot missiles. In other words, Ukraine wants to become a production site for drone technology that the US can use in exchange for Patriot systems.
There is now much talk that companies such as L3 Harris and Raytheon do not want to license their technologies to Ukraine for cheaper production of American weapons because they are afraid of intellectual property theft. Of course, if you produce all of this in the United States, it will be much slower than overseas.
Therefore, some argue that these outdated defense contractors, to the detriment of American lives , are trying to hold on to their intellectual property, even though it could be produced much more cheaply in Ukraine. And now Ukraine says: "Okay, don't give us your intellectual property. We'll just develop new technologies ourselves." And now Fedorov is seeking American investment for a new defense technology fund and offering to help Washington develop UAV capabilities in exchange for Patriot interceptors .
So, we will manufacture your drones. You give us Patriot. This is apparently from the same Times interview where it's called a not-quite- classic venture capital fund. Instead, we are writing a new history of war, and much of it will involve drones. Not only with high-speed interceptors to combat Russia's new jet attack drones.
We'll talk about them in a moment and how Kratos relates to all of this. But also about how we can produce better drones ourselves, which we could use either in partnership with Ukraine or independently, given that we may need them to protect against Iranian attacks in the Middle East, especially after the events of the last 24 hours.
He identified three top priorities for the fund: field robotics to reduce reliance on manpower, low-cost high-speed drone interceptors, and low-cost missiles with artificial intelligence support. Sounds a little creepy. However , he was the youngest Minister of Defense of Ukraine until he was dismissed after only 6 months in office.
And now he will head this, essentially, venture capital fund to seek financing. And it seems that Alex Karp is " taking the bait" completely. He became the first major new investor in the defense company that this former defense minister is creating. Russia is also now reportedly increasingly using jet-powered drones, which can reach speeds of up to 600 km/h , three times faster than a piston-powered drone.
This is definitely worth paying attention to, considering that while previously " Shahed" drones (I think that's how they're pronounced) flew at a speed of about 210 km/h, these are expected to move at a speed of about 480 km/h. So, we have a tremendous increase in speed. This is still significantly slower than a jet-powered ballistic missile, which can travel at Mach 7–10 , or thousands of kilometers per hour.
It's different from them, but these drones...well, missiles are obviously much faster, aerodynamically or for other reasons. These drones fly three times faster than conventional propeller-driven drones, creating problems in Ukraine, as they are now difficult to intercept due to their incredible speed.
In other words, offensive weapons are developing faster than defensive ones. Well, in short, do you understand what I mean? So, protection is evolving, and this is where Kratos comes to the rescue. So we'll do a fundamental analysis of Kratos to see what exactly they're developing and how it relates to this arms race.
But first, I want you to see these jet drones, some footage from Radio Liberty. Look at this, because I think when you see these jet drones compared to the slow ones that we've seen before -- those " Shaheeds," the videos that we've all seen on Twitter or somewhere. Look how fast these " birds" are.
These drones are commonly called "Shaheds" in Ukraine . In Russia they are called "Geran-2", but in recent weeks this drone has faded into the background. The upgraded version , known as Geran-4, now has a jet engine and the ability to control online. This is madness. This Ukrainian air defense calculation works with the Soviet Osa anti-aircraft missile system.
It still protects Ukrainian skies from enemy targets. So the big problem here is that these are outdated, more traditional defensive weapons. This is when you fire missiles at these drones to shoot them down. They interview this person. They talk about how important it is to shoot down these propeller drones, but how it is becoming increasingly difficult to shoot down these jet drones.
And that's where companies are now trying to come up with several different styles of intercepting this jet drone technology, or, really, any drone technology. Some of these options under development include radio frequencies. That is, simply trying to jam these drones, which is a more classic way of interception.
But there's still potential for how, what should we call it? We have it recorded here. Let's move on to what we wrote down. These systems. Here they are. Yes, I have my little fragment here. You have jamming, which is your radio frequency tool. You also have powerful microwaves. That is, the release of microwave energy to knock down an entire swarm in the shape of a cone.
I think of it as an area attack, like in World of Warcraft. Single target vs. multiple targets. So, in the shape of a cone, Raytheon is now producing the Phaser system for this. So you have radio frequency jamming, microwave radiation, and then directed energy, which would be like a laser shot. The idea here is that these defenses are much cheaper than launching a missile, as we just saw in the video , launching a missile at these drones.
It will cost you anywhere from $30,000 for a missile to $3 million for an interceptor like the Patriot. Whereas for these directed energy shots you are actually using electricity costing between $1 and $10 . You can see here in the Kratos earnings report, Q4 is important because of this program that we received funding for.
The Department of Energy is looking for companies to help protect nuclear facilities. They are developing a mobile and transportable system, where Kratos is the prime contractor responsible for the operation of the entire system, including directed energy weapons. Where the goal is to intercept these drones at a low cost, and these technologies are only now gaining momentum by 2027.
So if we go back here for a moment and just skip ahead, let's listen to this for just a moment. It is well known that the Russian army currently uses several versions of the Geran-3, Geran-4, and Geran-5 jet attack drones . The first adaptation of the Iranian drone Shahed- 238 is a transitional model with a flight speed of about 300 km/ h.
Ukrainian air defense units have repeatedly shot down these drones, but later versions of the Gerani are much faster than Ukrainian interceptors. Yes, and the key problem is precisely this speed. And the question is that these drones are produced in Russia using Iranian technology. Therefore, it would be easy for these jet drones to reach Iran by river across the Caspian Sea, and then Iran could use them against the US in the Strait of Hormuz.
I have a kind of written comparison here. As for the Shahed- 136, the speed is a little over a hundred miles per hour, or here we have kilometers per hour. And for the Geran-2 jet , which is also a Shahed drone, it is almost three times higher. Although they are expected to use Chinese jet engines. So, they're putting a small Chinese jet engine on them, and Kratos believes that one of the biggest growth areas for them is going to be jet engines.
Let me be clear: I don't own any shares in defense contractors or Kratos, so I'm not trying to promote the stocks as if I'm investing in them. We are simply studying this issue, and it seems very interesting to us. So, interceptor drones in Ukraine cost about $1,000, and these $1,000 drones can cause considerable damage.
Therefore, the cost of interception must be significantly lower than the cost of producing these drones to be competitive . It has to be fast enough to shoot down those jet drones. And therein lies the problem. These "Gerani-4 " are drones that are almost impossible to intercept . They are just too fast.
This poses a problem, and this is where Kratos states, " We may be working on a potential solution ." Of course, there are many military defense contractors for this. And Karp is obviously investing his money in the military- industrial complex through startups. Firstly, probably because he has access to these private companies; and secondly, because Palantir constantly advertises the importance of its AI systems for the war against Iran, as well as for Russia's war against Ukraine.
Palantir takes both sides on this issue. Well, you know , the Ukrainian side and the American side. And, of course, the Israeli side. Kratos, by the way, about Israelis, just acquired a company that was Israeli called Orbit Technologies Limited . And they are engaged in satellite communications for drones, UAVs, as well as for missiles.
They specifically state that they are the world's leading provider of mission- critical satellite communications for mobile and unmanned aviation, maritime, underwater and land-based systems, as well as other systems. Other systems are probably missiles. So if we look at Kratos' earnings report, there are some really interesting things they talk about.
Let's close all these little side panels as much as we can. I'll leave the bookmarks open. So, this is the directed energy side, and they have a $ 150 million contract to combat unmanned aerial vehicles or systems under the Solar Shield program. This is where we talked about different ways to protect against drones.
Keep in mind that there is also an American company that is more focused on police departments, called Axon, that uses Dedrone technology. They bought a company called Dedrone, but that's not the topic of this video. So, if I just go into some of the hints that Kratos gives now, look at that. The analyst asks about unmanned systems and recommendations for these unmanned systems.
And the president and CEO says this: "We have to be very careful here because of the customer. So we can't go into detail because it would give away what we're doing. Our business in hypersonics, engines, and space—those areas are growing rapidly. But on the drones, we're going to be very careful, and we might not be able to report until we ship them and it shows in the numbers.
And even then, we might not be able to say much about it , but you 'll know what it is ." This is a very transparent hint that over the next year Kratos expects a sharp increase in drone shipments—whether weapons, Valkyrie, or engines to aid in bombing campaigns or other operations. Remember , there is constant talk that the United States is critically low on ammunition following the Iran war.
These are examples of Boeing's long-range JDAM-ER . These JDAMs are powered by a turbofan engine, which is essentially a jet engine. And look at this. Kratos recently...Kratos supplies Spartan J85 engines. These are their turbofan engines that they produce to support Boeing's production contract for the JDAM.
So, in other words, Boeing goes to Kratos and says, "Hey, can you help with jet engine supplies for our missile program, essentially for the Department of Defense ?" Kratos is a fairly small company, valued at less than $10 billion. Here is the Spartan jet engine line . This is roughly what it looks like .
It's like a fan that you install in a bathroom, you know, those extractor fans. And here it looks a little less like a fan and more like a real jet engine. This is a jet engine for cruise missiles, joint combat aircraft, and other unmanned aerial vehicles. They also produce the Valkyrie aircraft. He is somewhere here.
It seems to be a unit of their air force, and I believe it is a Valkyrie, but I'm not sure. But in any case, they have the Valkyrie aviation system. Oh, there she is. This is the XQ- 58 Alpha. Yes, yes, exactly, it was Valkyrie. It was Valkyrie. Valkyrie costs between $3 million and $10 million apiece.
And what I find really interesting about Kratos' figures is that if you look at just the Valkyrie production, they estimate they can produce about 40 of these units per year. If we take the average price of $6 million for the Valkyrie, then 40 units per year multiplied by 6 million gives $240 million in potential annual revenue.
This is potential annual income. Last quarter, they only received about $5.9 million in revenue from Valkyrie. So, it's a very, very small part of their business. Their product sales are now around 237 million per quarter. So this alone could potentially double their quarterly revenue or product sales revenue for the quarter.
Let me explain this in more detail so that it is completely clear and there is no confusion. 240 million—that's roughly what they currently earn on products in one quarter. Valkyrie's annual sales of 240 million would essentially double one quarterly figure or add 25% to their product line per year.
This is an interesting indicator and an interesting way to look at the situation. But this is kind of a small option for their business. But where they're really making a lot of money right now is on the Spartan engine. They call this one of the biggest opportunities, as tens of thousands of such systems are expected to be sold.
We are currently planning initial orders for 3,000 Spartan turbojet engines. We expect to produce an additional 5,000 in 2028 . Each one costs about $50,000. So if you make 5,000 pieces in 2028 at 50,000, the calculator I used doesn't have that many zeros. 5000 multiplied by 50—that gives me this number.
1 2 3 200, that's 250 million right here. Only from jet engines. So you have real growth vectors not just from these engines , not just from the Valkyrie UAV, but also from the anti- drone technology that they're hinting at, "Well, you know, we can't say much right now , but you'll see it in our numbers." Interestingly, this is similar to how Elon Musk talks about his intention to produce components for jet engines.
For Elon's purposes, these would be gas turbine engines running continuously to power data centers. Here Kratos has a Blade Works plant in Oklahoma where they recently laid the groundwork for the production of these turbofan engines. Their hypersonic business is expected to double from 2025 to 2026 .
And they expect their Kratos engine business to be the largest and fastest- growing in the company's history. This is their expectation, especially given that China and Russia are deeply immersed in the development of hypersonic missiles. And remember what we have right here. China supplies jet engines for the jet-powered drones that Russia is using against Ukraine.
Big business. So, this is a company with a small market capitalization that is engaged in precisely this kind of vertical product development. That's the problem. They have negative free cash flow. We expect about minus $100 million in cash flow per year on average, although this quarter they already had about minus 47.
That's a lot, so it could be even more. The forecast negative free cash flow is minus 95 million. It could be more. Their balance sheet is not bad right now because they raised a lot of money. They issued a lot of shares. They raised a lot of money. So they have about a billion dollars of free cash flow.
1 billion in free cash flow. So if you take 200 million in capital expenditure per year, they have a budget for 5 years of capital investment. So that's pretty good. You know, they have a decent balance sheet and low long-term debt. The overall revenue growth is around 22.8% . Gross profit increased by approximately 21%, indicating relative stability in their margins.
We have capital formation. And here's the problem: valuation. The company's valuation is currently slightly overvalued. If you look at future margins, at the net margins that they expect, that is, their net margin right now is shamefully low. Their net profit is 11.9/371. Net margin is now 3.2%. Therefore, the projected margins bring them to a level close to 12-13%.
This really means they justify a PEG ratio of around 1.3. So, they are expensive. They are not cheap. You can...so now they trade with multipliers like in software. So, if we open the Stock AI tool, we will see that right now the Stock AI tool is telling us that this company belongs to the more expensive segment.
So, here's how we're going to do it. We will open the Reinvest Terminal application. And you see that we have a small terminal tab activated at the top right . We will introduce Kratos. And we see here that the balance sheet has a high rating. I would agree with that . Pricing policy and margins are stable, so it's pretty neutral here.
Moving average, stocks are down a bit. But the rating is really high, so we have a red flag regarding the rating. So we expect him to actually say that the projected rate of return here is negative. So when we open this, of course, there it is, -62% potential stock price forecast. This brings her back to a fair valuation of the company.
It's very expensive now, and it's been through quite a bit of movement. Let's put aside the weekly schedule for a moment. Look at this explosion she had . It was a truly meme-driven growth, and they raised funds during this meme rally, which was perfect. Perfectly. They raised money through a meme squeeze.
But now they're coming back to reality, and honestly, it could be a buy if the price fell to around $24, as that would be a technical pullback, and that would be very close to the fair value estimate that the stock tab has for this company. And now, if you scroll down to this company, you can automatically see a lot of the information that we have.
This is the Meet Kevin app. You can see a lot of information here, for example, about the hypersonic business doubling potentially to over 700 million, and almost doubling again next year, the unit economics of the jet engine. A lot of what you know we research manually is just built in here, which is really phenomenal.
This is a cool product that my startup Reinvest is developing. So we're very, very excited about this. But for me, the defense sector in investments is not going away anytime soon , mainly because the world is unfortunately becoming militarized again. I'm sorry to say this, but I think all of this needs to be looked at like this: here you have the USA, understand?
Then you have Europe and NATO. Europe, NATO, and up here you have Canada, okay? Europe and Canada do not trust America under Donald Trump. That's obvious, right? So a wall grew between the US and its ally Canada . There is a wall between Europe, Canada, NATO, and the United States. This is exactly what Russia wants.
Of course? Russia can take advantage of this, as can China, especially if we are critically short of ammunition. You know, we need to increase, increase production. We need to print more money and spend more on defense. And then you have Russia, North Korea, Iran, and China. And you think they're arguing among themselves?
Is China imposing tariffs against Russia? Does Iran make fun of North Korea or China with memes, call them morons, or something else? No. These guys are getting stronger. And that's why Germany, for example, is now saying : "Yo, what's this nonsense? We have Russian drones, Russian strike drones in Germany." So, we actually have, well, a disaster, first of all.
But secondly, we have Europe saying, "Oh my God, we need to spend more money on defense." Canada says, "We need to spend more money on defense. We may find ourselves a little geopolitically isolated in the region." You know, there's also Greenland. I'll even mention them. Greenland, if it's even worth mentioning, needs a little more military funding along with Denmark.
It is clear that the United States should be investing more money in replenishing all the ammunition we have expended. And of course, all these guys are arming themselves now, especially after the IAEA said, "Oh, we have no idea what's going on with Iran's nuclear program." We did not have access to their nuclear facilities or to their now fourth declared nuclear fuel enrichment facility in Isfahan or Pyramid Mountain.
We don't have access to this. We have no idea what is happening with their nuclear program. We don't know where their nuclear weapons are. So now we have nuclear proliferation, where other countries say, "Oh , let's build our own nuclear weapons too." Plus the remilitarization of the world. And then there's Kratos, a small $9 billion startup that makes engines for bombs and drones.
Too cheerful, Kevin. Too cheerful. No, I'm not, I'm not, I'm not, I'm not related to Kratos. I don't get paid by Kratos. I'm not invested in Kratos. War is terrible. I hate all of this. But the reality is that this is happening now. The world is getting armed, and defense contractors will get a sizable chunk of money for helping to rearm the worl.
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