Kratos and Planet Labs Soar on AI Hype, but Aerospace and Defense Giants Loom

In less than six months, Wall Street has catapulted the shares of two small aerospace and defense companies into the stratosphere.

Kratos, a drone-surveillance specialist, has soared an eye-popping 201.5% over the past year, closing at $80.77 on Friday. Planet Labs, which uses AI satellites to monitor everything from natural disasters to troop activity, has jumped 171.3%, closing at $11.11.

Neither company is a household name in aerospace and defense—the realm of giants like Boeing and Northrop Grumman—yet they are leading the gains in a sector that has rallied 28.9% this past year, above the S&P 500’s 17.9% rise over that same period.

Kratos and Planet Labs are capturing investor attention by using AI to deliver capabilities that traditional aerospace and defense giants struggle to match.

“Investors are looking for faster growth in companies focused on the evolution of warfare,” said Derek Bisaccio, lead international defense analyst at Forecast International. Now Wall Street is watching to see whether these gains can last, or if larger competitors will outpace the upstarts as new AI capabilities are tested.

 

Zooming out to the broader sector, companies large and small are reporting rising orders as global instability pushes the war economy into overdrive. Aerospace and defense stocks surged in April, even as other industries faltered under tariffs and signs of a wobbling economy. 

“Geopolitical risks tend to drive government spending on defense budgets, and in turn investor appetite for stocks in the defense sector,” said analyst Nicolas Owens of Morningstar. Because defense contractors often move independently of broader trends, noted Owens, some traders view legacy firms as a safe bet with consistent returns. But others, chasing breakout potential, are backing scrappy newcomers promising the technological advantage governments and contractors are hungry for. 

Drones, which have played a pivotal role in the war in Ukraine, are driving militaries worldwide to seek smarter, more efficient “unmanned systems,” noted Bisaccio.

Kratos’ tactical drones, powered by artificial intelligence, can fly hands-off, work alongside manned fighter jets, and execute increasingly complex missions. It’s a capability the company, according to its website, says will help the U.S. and its allies “retain a decisive edge in a new age of conflict.” 

That sales pitch has struck a chord in Washington. 

In early July, shares jumped 12% after Defense Secretary Pete Hegseth lifted Pentagon restrictions to “unleash” U.S. drone production, calling for service members to use low-cost, homegrown models. Shortly after, analysts, including Noble Capital, raised the price target from $44 to $60, citing Kratos’ growth potential.

Planet Labs is similarly leaning on AI as the linchpin of its growth strategy. Its AI-enhanced Pelican satellites can capture sharper, more frequent images from space, using algorithms to sift through torrents of visual data without the need for human eyes. On July 1, shares jumped 9.3% after the company secured a $283 million German government contract for Pelican services.

Daniel U., who bets on defense stocks, says it’s hard not to be excited by the kind of weapons and technology coming out of these two companies. Their appeal, he says, lies in cutting battlefield inefficiencies that “bloated giants” can’t do under their existing technology.

“The Magic Johnson era of warfare is getting an upgrade,” said the retail investor. “One of these companies could be our Michael Jordan.”

 

But Paul Strehle, portfolio manager at USA Mutual Advisors, has his doubts. 

Strehle’s ‘vice’ fund targets profits in industries often seen as morally questionable, from gambling to warfare. Military stocks make up about 20% of the portfolio, and it’s almost entirely invested in the big-name defense firms.

Although he acknowledges pure-play drones and satellite companies like Kratos and Planet Labs can, and are, successfully carving out market share as innovative specialists, he hesitates to commit major capital behind them until they demonstrate staying power.

“We don’t really dabble in any smaller military defense because a lot of them get rolled up pretty quickly and disappear,” said Strehle. “For our fund investors, we’re looking for really consistent returns from the bigger names.”

Roll-up—the act of a larger company buying smaller firms—is a common corporate strategy by big businesses to consolidate competitors. The threat of buyouts isn’t lost on Kratos. In its latest annual SEC filing, the company warned that it faces rivals of all sizes, from specialized mid-tier contractors to massive defense and IT firms. Former partners or subcontractors could turn into competitors from one day to the next.

Planet Labs, likewise, is sweating the thought of better-funded competitors like Airbus Defense and Space pulling ahead by building bigger, faster, or cheaper AI satellite fleets, luring customers away, and limiting the company’s growth.

And while Kratos dominates the AI drone chatter on Wall Street, titans like Northrop Grumman are determined to prove that the big players can catch up with the nimble innovators. It announced in June that it is racing to make AI-powered drones smarter and faster, teaming with four partners, including Shield AI, under its secretive Beacon program.

“We want to dispel this idea that big companies can’t move fast, can’t be innovative,” Tom Jones, president of Northrop’s aeronautics systems sector, told Axios.

If hypercompetition looms, investors don’t seem fazed. With shares climbing fast for Kratos and Planet Labs, Wall Street is already scanning the horizon for the next milestone—whether it’s a fresh AI breakthrough or a fat new government contract. 

“Can they deliver? We don’t know yet because the technology is still maturing,” said Richard Aboulafia, Managing Director of AeroDynamic Advisory. “Big defense firms probably aren’t losing sleep just yet.”