【English Edition】AVAV・KTOS・RCAT — The Battlefield Is Changing: 3 U.S. Defense Stocks Moving Into Unmanned Weapons, Interception and Directed Energy

Modern warfare is entering a new phase.

Unmanned systems are rapidly becoming an important part of military operations, but the investment opportunity is much broader than the simple “drone” story.

The battlefield is evolving toward systems that can be produced rapidly, deployed in large numbers, continuously upgraded, and integrated with sensors, communications, electronic warfare, precision weapons, and defensive systems.

At the same time, the growing number of unmanned systems creates another requirement: the ability to detect, track, disrupt, intercept, and destroy hostile unmanned systems.

This creates a two-sided defense market.

The companies building unmanned systems may benefit from increased procurement.

The companies developing counter-unmanned systems may benefit from the same trend.

And companies providing propulsion, sensors, communications, electronic warfare, directed energy, radar, and command-and-control technologies can potentially benefit from both sides of the market.

Three U.S. companies illustrate three very different investment profiles:

AeroVironment (AVAV)

Kratos Defense & Security Solutions (KTOS)

Red Cat Holdings (RCAT)

These companies should not be treated as interchangeable.

AVAV has the largest current revenue base of the three and substantial funded backlog.

KTOS has broader exposure across defense modernization and has a much larger total backlog than AVAV.

RCAT is much smaller and considerably more speculative, but its revenue growth is currently occurring at a dramatically higher percentage rate.

The opportunity is large.

The risks are equally important.

THE MARKET IS MOVING BEYOND THE SIMPLE DRONE STORY

The biggest mistake investors can make is viewing unmanned defense as one product category.

An unmanned aircraft is only one component of a larger system.

A modern unmanned platform can require sensors, communications, navigation, propulsion, secure data links, control stations, launch systems, surveillance, electronic warfare, and command-and-control infrastructure.

The defensive side requires another layer.

Military forces need systems capable of detecting and identifying hostile unmanned aircraft.

They may then need electronic warfare, jamming, interception, directed energy, short-range air defense, or other methods to defeat the threat.

This creates a potentially recurring procurement cycle.

More unmanned systems can create more demand for counter-unmanned systems.

More sophisticated countermeasures can create demand for more sophisticated unmanned systems.

That cycle could make the market more durable than a one-time procurement boom.

THE UKRAINE EFFECT

The war in Ukraine has accelerated the operational development and deployment of unmanned systems.

One of the most important lessons is that relatively inexpensive systems can be deployed in large numbers and adapted rapidly.

This creates a significant economic challenge for traditional defense procurement.

A very expensive weapon system may not always be the most economical way to defeat a relatively inexpensive unmanned aircraft.

That creates demand for lower-cost and scalable defensive systems.

Electronic warfare is one potential solution.

Lower-cost interceptors are another.

Directed-energy weapons are another.

The objective is increasingly to build a defense architecture that remains economically sustainable when the number of incoming systems becomes very large.

This is where the investment story becomes much broader than aircraft manufacturing.

AEROVIRONMENT — AVAV

AeroVironment currently provides the strongest combination of scale, established unmanned systems, funded backlog, precision-strike capabilities, counter-unmanned exposure, and emerging directed-energy opportunities among these three companies.

Its latest fiscal first-quarter results were released on September 9, 2026.

For the quarter ended August 1, 2026, AeroVironment reported revenue of approximately $480.5 million, an increase of 6% from approximately $454.7 million in the prior-year quarter.

Uncrewed Aircraft Systems revenue was approximately $120.2 million, compared with approximately $70.2 million in the prior-year quarter.

That represents growth of roughly 71% in the unmanned-aircraft business.

This is one of the most important numbers in the entire comparison.

The company is not simply benefiting from a general defense-sector recovery.

Its core unmanned business is experiencing substantial demand.

FUNDED BACKLOG

As of August 1, 2026, AeroVironment had approximately $1.458 billion of funded backlog.

The company expects approximately 78% of that funded backlog to be recognized as revenue during fiscal 2027.

Funded backlog is particularly important because it represents remaining performance obligations under firm orders for which funding is appropriated under the customer contract.

This provides considerably more visibility than an announced opportunity or an unfunded award.

AeroVironment also reported approximately $1.367 billion of unfunded backlog.

Investors should not treat that amount as guaranteed revenue.

Unfunded backlog does not obligate the customer to purchase the products or services and may never convert into orders.

This distinction is essential when evaluating defense companies.

A large pipeline can look impressive.

Funded backlog is much more meaningful.

And recognized revenue is more meaningful still.

CASH FLOW AND PROFITABILITY

AeroVironment's latest quarter was not perfect.

Total gross margin improved substantially, but the company still reported a GAAP net loss of approximately $5.1 million for the quarter.

Non-GAAP adjusted EBITDA was approximately $53.4 million.

This demonstrates an important point.

Rapid defense growth does not automatically produce immediate GAAP profitability.

The company is investing heavily in production capacity, facilities, and future programs.

Its fiscal 2027 revenue guidance remains approximately $2.125 billion to $2.225 billion.

Management expects non-GAAP adjusted EBITDA of approximately $305 million to $325 million.

That guidance creates a useful benchmark for investors.

The next question is whether production growth can translate into sustainable profitability and cash generation.

DIRECTED ENERGY CHANGES THE STORY

AeroVironment's investment story is becoming broader than conventional unmanned aircraft.

The company currently reports operating groups including Uncrewed Aircraft Systems, Precision Strike and Defense Systems, Space and Directed Energy, and Cyber and Mission Solutions.

At the same time, management reports the broader Space, Cyber and Directed Energy segment, or SCDE.

SCDE revenue in the latest quarter was approximately $134.5 million, down 21% year over year.

SCDE adjusted EBITDA was negative approximately $8.9 million, compared with positive approximately $3.8 million in the prior-year quarter.

This is a significant risk.

The company has strong growth in unmanned systems, but not every business area is performing equally well.

Investors should therefore avoid treating the entire company as a uniform growth story.

However, there is another important development.

On September 2, AeroVironment announced a $464.8 million U.S. Army contract for its LOCUST system under the Enduring-High Energy Laser program.

The company described the award as the first-ever production contract for directed-energy systems in U.S. history.

That potentially changes the long-term opportunity.

Directed energy is moving from experimentation toward production.

And the market is no longer limited to the United States.

On September 8, AeroVironment announced its first international LOCUST directed-energy counter-drone purchase order, valued at more than $50 million.

This is important because it demonstrates that the counter-unmanned market may be developing internationally as well as domestically.

AVAV'S MAIN RISKS

The first risk is valuation.

A strong growth story can become a poor investment if the market price already discounts too much future success.

The second risk is execution.

Large government contracts require production capacity, supply-chain management, delivery performance, and working capital.

The third risk is uneven business performance.

The latest SCDE results demonstrate that some parts of the company remain under pressure.

The fourth risk is government procurement timing.

Defense budgets can change, programs can be delayed, and contract schedules can move.

Therefore, the most important indicators are not simply contract announcements.

Investors need to follow backlog conversion, revenue growth, margins, and cash generation.

KRATOS DEFENSE — KTOS

Kratos represents a different investment profile.

The company has exposure to unmanned systems, but it is much broader than that.

Its businesses include defense rocket systems, turbine technologies, microwave products, space, training, cyber, hypersonic systems, propulsion, and unmanned systems.

This diversification can become particularly valuable as defense procurement moves toward integrated systems rather than isolated platforms.

Q2 2026 RESULTS

For the second quarter of 2026, Kratos reported revenue of approximately $458.8 million.

That represented growth of 30.5% year over year and organic growth of 19.1%.

The Unmanned Systems segment generated approximately $79.1 million of revenue, up from approximately $73.2 million in the prior-year quarter.

Organic growth in Unmanned Systems was 8.1%.

The Government Solutions segment generated approximately $379.7 million, with organic growth of 22%.

This is important.

Kratos' growth is not dependent exclusively on unmanned systems.

Defense rocket systems, turbine technologies, microwave products, and space, training and cyber activities are also contributing.

BACKLOG

Kratos reported total backlog of approximately $2.084 billion as of June 28, 2026.

Of that amount, approximately $1.572 billion was funded backlog.

Approximately $512.7 million was unfunded.

Kratos also reported a bid-and-proposal pipeline of approximately $15 billion.

The pipeline is potentially significant, but investors must not confuse it with revenue.

A pipeline represents opportunities being pursued.

It is not a signed contract.

It is not funded backlog.

It is not recognized revenue.

The distinction is critical.

Kratos' trailing twelve-month consolidated book-to-bill ratio was approximately 1.3.

Its second-quarter book-to-bill ratio was approximately 1.1.

This indicates that bookings are currently supporting the growth of the backlog.

However, backlog conversion depends on contract execution and government funding.

NEW PROGRAM MOMENTUM

Kratos is increasingly involved in areas such as hypersonics, missiles, air defense, radar, counter-unmanned systems, and directed energy.

On August 31, 2026, Kratos announced an approximately $35 million national-security-related military-grade hardware production award.

The company stated that the hardware and related systems would directly support the warfighter.

More importantly, Kratos said it is currently in large-scale production for multiple national-security programs, including hypersonics, counter-unmanned aerial systems, air defense, missiles, radars, and high-powered directed-energy initiatives.

This is important because the company is not merely developing technologies.

It is moving multiple programs into production.

FINANCIAL STRENGTH AND DILUTION

Kratos had approximately $1.438 billion of cash and cash equivalents at June 28, 2026.

That provides substantial financial flexibility.

However, investors need to understand where much of the cash came from.

During the first six months of 2026, Kratos received approximately $1.348 billion of net proceeds from common-stock issuance.

The February offering involved approximately 16.43 million shares at $84 per share.

The gross proceeds were approximately $1.380 billion, with approximately $1.348 billion received after underwriting fees and other offering expenses.

This is a major capital infusion.

It strengthens the balance sheet and gives Kratos the ability to invest aggressively.

But it also increases the number of shares outstanding.

Therefore, dilution is a real issue.

The key question is whether the capital raised produces enough additional revenue, margins, and long-term cash generation to compensate existing shareholders for that dilution.

CASH FLOW

Kratos used approximately $11 million of operating cash during the second quarter.

The company has also stated that significant investment in inventory, facilities, capital expenditures, and new programs is currently adversely affecting free cash flow.

For fiscal 2026, management expects operating cash flow of approximately $30 million to $50 million.

Capital expenditures are expected at approximately $125 million to $135 million.

The company currently expects free cash flow use of approximately $85 million to $105 million.

This is an important warning.

Strong revenue growth does not automatically mean strong free cash flow.

Kratos is deliberately investing ahead of future demand.

That can be positive if the investments generate high returns.

It can also create pressure if expected programs are delayed.

KRATOS GUIDANCE

Kratos raised its fiscal 2026 revenue guidance to approximately $1.750 billion to $1.810 billion.

Management expects organic revenue growth of approximately 18% to 23%.

It also expects full-year adjusted EBITDA of approximately $173 million to $176 million.

The company expects the second half of fiscal 2026 to be significantly stronger than the first half.

That makes the next two quarters particularly important.

Investors will need to determine whether the projected acceleration actually appears in reported revenue, margins, and cash flow.

RED CAT HOLDINGS — RCAT

Red Cat is the most speculative of the three.

It is also the company with the most dramatic percentage revenue growth.

For the quarter ended June 30, 2026, Red Cat reported revenue of approximately $20.2 million.

That was 527% higher than the $3.2 million reported in the prior-year quarter.

For the first six months of 2026, revenue reached approximately $35.7 million.

That represented growth of approximately 636% from approximately $4.8 million in the prior-year period.

The company attributed the increase primarily to scaling drone deliveries to the U.S. Army and the commencement of deliveries to the Japan Ground Self-Defense Force.

That is a significant transition.

The company is moving from a smaller emerging defense technology business toward actual government deliveries at scale.

MARGINS

Red Cat reported second-quarter gross profit of approximately $3.3 million.

Gross margin was approximately 16.1%.

That was a major improvement from the prior year.

However, the company remains far from mature profitability.

Research and development expenses increased substantially as the company invested in new platforms, autonomy, and additional technologies.

The company is spending heavily to expand its capabilities.

This can create substantial long-term opportunity.

It can also consume large amounts of cash.

CASH AND WORKING CAPITAL

At June 30, 2026, Red Cat had approximately $325.6 million in cash.

Current assets totaled approximately $425.1 million.

Inventory and prepaid inventory totaled approximately $84.8 million, compared with approximately $30.4 million at December 31, 2025.

That is a substantial increase.

The company is building inventory to support higher production and deliveries.

During the first six months of 2026, Red Cat used approximately $78.7 million of cash in operating activities.

The company said the increase in operating cash usage was primarily attributable to inventory purchases.

This is one of the most important risks in the RCAT story.

Revenue can grow extremely quickly while cash flow remains negative.

If production expands faster than cash collection and gross-margin improvement, additional financing may eventually be required.

FINANCING AND DILUTION

Red Cat also raised approximately $258.75 million through its May 2026 registered direct offering before underwriting fees and other offering expenses.

This substantially strengthened the balance sheet.

However, the capital came through the issuance of additional shares.

That means dilution must remain part of the investment analysis.

The correct question is not whether dilution is automatically bad.

The correct question is whether the capital raised produces enough incremental revenue, margin expansion, and cash generation to create greater long-term shareholder value.

INTERNATIONAL EXPANSION

Japan is an important development for Red Cat.

In May 2026, the company announced a contract and order for Black Widow drone systems under a Japan Ministry of Defense procurement process.

The end user is the Japan Ground Self-Defense Force.

The systems are expected to be delivered under Japan Fiscal Year 2026.

This provides Red Cat with an important international defense reference.

International expansion can potentially increase the addressable market.

But it also introduces export, regulatory, procurement, and geopolitical risks.

GAUNTLET II

Another important catalyst is the Drone Dominance program.

Red Cat announced that its Teal Drones advanced to Gauntlet II, placing the company among finalists competing for a potentially significant U.S. military procurement opportunity focused on rapidly fielding low-cost drone systems.

This is a meaningful opportunity.

But it is still an opportunity.

Investors should not treat advancement in a procurement competition as equivalent to a funded production contract.

That distinction is essential.

RCAT'S REVENUE TARGET

Red Cat is reaffirming a full-year 2026 revenue target of approximately $150 million to $180 million.

This is an aggressive target relative to the company's historical revenue base.

The first six months produced approximately $35.7 million.

Therefore, the second half of the year would need to be substantially stronger to reach the target range.

That makes production ramp-up and government deliveries particularly important.

THE BIGGER INVESTMENT THEME

The real opportunity may not be “drones.”

The larger theme is the transformation of military procurement toward scalable autonomous and unmanned systems.

That transformation includes:

Unmanned aircraft.

Counter-unmanned systems.

Electronic warfare.

Radar.

Directed energy.

Precision strike.

Propulsion.

Secure communications.

Command and control.

Autonomy.

Manufacturing capacity.

The companies that can combine several of these capabilities may ultimately have an advantage over companies focused on a single product.

This is why AVAV and KTOS have broader strategic value than simply being classified as drone manufacturers.

It is also why RCAT should be viewed as a higher-risk growth company rather than simply another version of AVAV.

THE ECONOMIC BATTLE

There is another important issue investors should consider.

The future battlefield may not be determined only by technological superiority.

It may also be determined by economics.

If a $1,000 or $10,000 unmanned system forces an adversary to spend hundreds of thousands or millions of dollars to defeat it, the economics can become unsustainable.

This creates a powerful incentive for cheaper countermeasures.

Electronic warfare can potentially provide a lower-cost response.

Directed energy can potentially reduce the cost per engagement.

Lower-cost interceptors can provide another option.

At the same time, manufacturers of unmanned systems are under pressure to produce systems at lower cost and greater scale.

This creates an arms race in both technology and economics.

WHO HAS THE STRONGEST POSITION?

AVAV currently has the strongest combination of established unmanned systems, funded backlog, precision-strike exposure, counter-unmanned systems, and directed-energy opportunities.

Its latest results demonstrate strong demand in Uncrewed Aircraft Systems.

The company also has meaningful international expansion potential for LOCUST.

However, its SCDE business remains under pressure and valuation risk is significant.

KTOS has the broadest defense-modernization exposure of the three.

Its total backlog is approximately $2.084 billion, with approximately $1.572 billion funded.

Its $15 billion bid-and-proposal pipeline is substantial.

Its cash position is strong.

However, the company is spending heavily to expand capacity and has increased its share count through a major equity offering.

Its free cash flow remains under pressure as it invests for future growth.

RCAT has the highest percentage-growth potential.

Revenue increased 527% year over year in the latest quarter.

The company is gaining actual government delivery experience in the United States and Japan.

It has a strong cash balance following its financing.

But it also has the greatest execution risk, cash-burn risk, inventory risk, and dilution risk.

WHAT SHOULD INVESTORS WATCH NEXT?

For AVAV:

Funded backlog conversion.

UAS revenue growth.

LOCUST production.

International counter-unmanned orders.

SCDE recovery.

Gross margin.

Free cash flow.

Fiscal 2027 guidance execution.

For KTOS:

Valkyrie and unmanned-system production.

Defense rocket and hypersonic programs.

Backlog conversion.

Book-to-bill.

Operating cash flow.

Capital expenditures.

Share-count growth.

Free cash flow.

For RCAT:

U.S. Army deliveries.

Japan deliveries.

Gauntlet II developments.

Production capacity.

Gross-margin expansion.

Inventory.

Operating cash flow.

Cash burn.

Additional financing.

Share dilution.

FINAL ASSESSMENT

The unmanned-defense market is becoming a structural component of modern military procurement.

The important investment thesis is therefore not simply that more drones will be purchased.

The deeper thesis is that military systems are moving toward scalable unmanned platforms, counter-unmanned defenses, electronic warfare, directed energy, autonomous systems, secure communications, and rapidly expandable manufacturing capacity.

AVAV, KTOS, and RCAT provide three very different ways to participate in that transformation.

AVAV offers the strongest combination of current scale, funded backlog, established unmanned programs, and counter-unmanned and directed-energy exposure.

KTOS offers broader exposure to defense modernization, with a large backlog and substantial financial resources, but also significant investment requirements and dilution.

RCAT offers the most aggressive growth profile, supported by rapidly increasing revenue and expanding government deliveries, but with considerably higher financial and execution risk.

The most important lesson is that contract headlines alone are not enough.

Investors should follow the entire chain:

Opportunity.

Contract award.

Funding.

Backlog.

Production.

Delivery.

Revenue.

Margin.

Cash flow.

Only when that entire chain begins working together does a defense technology story become a durable investment case.

The next stage of the market will therefore be determined not only by who develops the most advanced systems, but by who can manufacture them at scale, win government programs, maintain acceptable margins, manage capital efficiently, and convert rapidly growing demand into sustainable cash generation.

That is the real opportunity emerging from the transformation of modern warfare.

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