AVAV, KTOS Win Wedbush Double Outperform in Drone Era

Wedbush initiates AeroVironment and Kratos Defense at Outperform, naming both long-term winners as drone warfare and NATO spending drive a structural shift to autonomous defense systems.

Lead

Wedbush Securities initiated coverage of AeroVironment (AVAV) and Kratos Defense and Security Solutions (KTOS) at Outperform on July 1, 2026, arguing that accelerating drone warfare and a multi-year NATO budget expansion have created a durable, multi-year earnings cycle for autonomous-systems pure-plays that legacy defense primes are structurally unable to replicate. AVAV shares rose 4.1% and KTOS gained 4.9% on the day of the initiation, extending a year-to-date run for Kratos that had already exceeded 200%.

Why Did Wedbush Choose These Two Now?

The two initiations arrive as battlefield evidence from Ukraine, the Middle East, and the Pacific rim has forced a fundamental re-evaluation of force structure inside NATO capitals and the Pentagon. Defense budgets across the alliance are reallocating toward autonomous air systems, counter-drone platforms, and software-defined weapons at the expense of traditional capital programs. Wedbush's thesis holds that AeroVironment and Kratos sit at the precise intersection of that reallocation: one as a category creator in tactical unmanned systems, the other as an embedded supplier of mission-critical software and components to virtually every tier of the U.S. defense industrial base.

What Makes AeroVironment a Long-Term Defense Tech Winner?

AeroVironment is no longer a single-platform drone maker. Through its 2025 acquisition of BlueHalo, the company built a multi-domain franchise spanning air, land, sea, space, and cyber - a footprint Wedbush describes as systematically undervalued by the market. The Switchblade loitering munition series, the Raven small reconnaissance drone, and the Puma maritime system each carry high operational tempo globally, while the newly integrated directed-energy and space communications portfolio addresses the fastest-growing spending lines in both U.S. and allied procurement plans. A recent $50 million-plus international purchase order for the LOCUST Laser Weapon System underscores that demand is expanding beyond the U.S. Army. The $250 price target implies roughly 51% upside from AVAV's close preceding initiation and reflects a re-rating Wedbush ties to margin recovery and backlog conversion as a prior restatement and Space Force contract termination fade from the stock's valuation discount.

Is the AeroVironment Valuation Reset an Entry Point?

A material-weakness disclosure and a Space Force contract termination earlier in 2026 compressed AVAV shares from a 52-week high of $417.86 to a low of $135.20. Wedbush frames that drawdown as a buying opportunity rather than a structural impairment, noting the company's $1.5 billion funded backlog and first-mover positioning across the tactical drone market remain intact. As of September 23, 2026, AVAV traded near $157.87, leaving substantial distance to consensus analyst price targets that average $221.50 - a gap Wedbush's coverage now anchors at the high end.

What Is Wedbush's Case for Kratos?

Wedbush analyst Sam Brandeis characterizes Kratos as a "misunderstood" merchant arms supplier to the entire U.S. defense complex - a business model that insulates it from program-by-program risk and gives it exposure across hypersonic weapons, missile defense, space technologies, and microelectronics simultaneously. Rather than competing with Lockheed Martin or Northrop Grumman for prime contracts on large platforms, Kratos supplies the software and specialized components those primes depend on, along with serving newer entrants remaking the defense supply chain. The $85 price target implies approximately 70% upside from the stock's close on initiation day.

The underlying financial momentum supports the thesis. Kratos reported Q2 2026 revenues of $458.8 million, a 30.5% year-over-year increase, while total backlog climbed to $2.084 billion - $1.572 billion of which is funded. Capital expenditure guidance of $125 million to $135 million for 2026 signals accelerating manufacturing scale in its jet engine and tactical drone lines. Kratos' unmanned systems segment remains the primary growth engine, with the company targeting expanded production capacity to meet demand the market sees as secular rather than cyclical.

Market Rotation: Legacy Primes vs. Autonomous Pure-Plays

Why Are Investors Rotating Away From Legacy Defense Primes?

The shift reflects procurement reality rather than preference. Traditional defense contractors face cost overruns, schedule delays, and program cancellations on large manned platforms while smaller, software-intensive, rapidly iterating autonomous systems demonstrate battlefield utility in real conflicts at scale. Program offices in Washington and allied capitals are responding by directing incremental budget dollars toward the autonomous-systems segment - precisely where AVAV and KTOS operate. Kratos' year-to-date gain exceeding 200% by mid-2026, following a 190% surge in 2025, reflects that rotation in capital markets terms. The Wedbush initiations add institutional validation to a theme that retail and growth-oriented funds had already begun pricing.

NATO's 2% GDP spending floor, now broadly met or exceeded by member states in response to sustained geopolitical pressure, has created a durable demand signal. Alliance modernization programs specifically targeting drone acquisition, counter-UAS, and AI-enabled command-and-control systems are generating multi-year contract pipelines that favor pure-play suppliers over diversified primes weighted toward legacy aircraft and naval programs.

Outlook

The Wedbush double initiation crystallizes a consensus forming across the defense analyst community: drone warfare and NATO modernization represent a structural, multi-year budget cycle rather than a short-term procurement spike. AeroVironment's evolving multi-domain portfolio and Kratos Defense's embedded position as a merchant supplier across hypersonics, space, and autonomous systems give both companies compounding exposure to that cycle. Near-term catalysts include AVAV's Q1 fiscal 2027 earnings and continued backlog build at KTOS, where funded orders already cover more than one year of current revenue run rate. Consensus now watches whether either company can sustain margin expansion alongside the top-line growth their backlogs imply.