Affordability as a Technology: Kratos and the Changing Face of Defense

The defense sector is changing. 

With the US defense budget for 2026 projected at over $1trn, the Trump administration is pushing the modernization of the nation’s defense infrastructure amid rising tensions worldwide. A large portion of this — approximately 17% in 2024, as shown in the graph below — goes to procurement, which is where defense hardware manufacturers such as Kratos [KTOS] come in.

As the “the go-to merchant supplier” for both legacy defense firms such as Lockheed Martin [LMT] and Northrop Grumman [NOC] and newer defense startups, Kratos produces everything from target unmanned aerial vehicles (UAVs) to satellite communications and microwave systems, all at scale and for a low cost point. 

In the latest edition of OPTO Sessions, Kratos CEO Eric DeMarco discusses why the company approaches “affordability as a technology”, and what success looks like for a government contractor in an increasingly volatile era.

Affordability-driven Disruptor

With the first six days of the US-Israel offensive against Iran costing an estimated $11.3bn, the need for affordable defense hardware has never been greater.

The company operates in line with a number of “Kratos-isms”, DeMarco explains, but one of the most important is “affordability as a technology.” In a value chain dominated by high-cost, high-risk “exquisites”, like fighter jets, Kratos provides the expendable essentials to get the rest of the job done, whether that’s test drones or counter-UAV solutions. “Every product that we engineer, develop and design for high-scale manufacturing, we do with low cost in mind for affordable mass.”

Given the current nature of warfare, the company’s drones often steal the spotlight. “We’re the number one provider of target drones in the world,” DeMarco notes.

That said, other verticals could soon see even more explosive growth. “When investors look at Kratos today, they’re focused on the drones … I believe you and I are going to see over the next two, three or four years, they’re going to get equally or more excited about what we’re doing in the hypersonic area with our hypersonic flyers and what our space and satellite business is doing.”

Kratos is already manufacturing and selling a number of products in these spaces. In terms of hypersonics, “Kratos is the only company in the US, and I would say in the world, that is routinely flying hypersonic systems,” DeMarco details. “Hypersonics in my opinion are like stealth was 30 years ago – almost impossible to stop.”

Government funding is already targeting the segment, he says. “I believe, at least until 2029, that hypersonics is going to be one of the most well-funded mission critical areas of our national security establishment.”

But when it comes to delivery of hypersonic systems, Kratos is already ahead of the curve. “Ours are low cost. They’re flying today. They’re very capable, which is why it may be the fastest growing business in the entire company right now.”

In terms of space, the company has invested over $100m to develop ground-based command and control systems for satellites. DeMarco points to the ongoing boom in telecoms satellite launches for companies such as SpaceX and Amazon’s [AMZN] Leo, in which such systems will play a key role. “A satellite is not worth anything if it can’t communicate with the ground,” he notes. 

Kratos’ competitive advantage is easily summed up. “We are in the right place at the right time with the right products at a low cost point. Our trajectory is up and to the right for the foreseeable future.”

The Future of Defense

Indeed, the geopolitics of the moment are sure to keep defense top-of-mind for policymakers. With tensions on multiple fronts increasing, “the US has got to get ready for this,” DeMarco asserts. “And I am a firm believer in peace through strength.”

The Trump administration has focused considerable resources on modernizing defense infrastructure and leveraging military action on the global stage. Whether or not that’s good for the world, it is certainly a tailwind for defense contractors. Kratos, for the time being, has a clear runway. “The only thing that will slow us down is if there’s global peace and we don’t see global peace coming.”

The way that deals are made and approved has also changed with the current administration, DiMarco explains, expanding the potential partners Kratos has to work with. In order to fulfill the demand for defense systems, a change in the Mission Technology Control Regime Act in 2020 reclassified aircraft that travels slower than 800km per hour to make them easier to export. While “there was a presumption of denial,” DeMarco explains, “now there’s a presumption of approval.”

That represents a “big sea change in the industry and for Kratos’ ability to sell certain systems internationally.”

Ultimately, demand at home and abroad is expected to be enough to keep Kratos growing. “There is a generational recapitalization of strategic weapons systems happening right now. The US industrial base for strategic systems to take on Russia and China has atrophied. So we have a defense budget of a trillion dollars … We have five-and-a-half primes, and we have Kratos.”

The Meaning of Success

In the end, DeMarco is not interested in Kratos being the biggest defense contractor in the US. “Bigger does not mean more valuable. It doesn’t mean more valuable to shareholders, and it doesn’t mean more value to the government.”

Instead, real world usefulness trumps financial growth, especially in a sector as critical as defense. By offering more affordable technology, “instead of making 12%, Kratos makes 9%. And that enabled my war fighter customer to get three more of those things to save lives. That’s a no-brainer to me.”

So, what does success look like? DeMarco looks at the big picture, not the balance sheet: “Success is that, with Lockheed and Northrop and the other big defense companies, we have deterred World War III … Success is going to be that our taxpayer has spent billions of dollars and that money has been put to good use.”