Chit Chat Stocks - Kraken Robotics: A Hypergrowth Small-Cap Stock For The Defense Spending Supercycle

Episode Date: September 24, 2025

On this episode of Chit Chat Stocks, Brett provides a comprehensive research report on a small-cap stock seeing rapid revenue growth due to changing dynamics in the defense sector. Subscribe to our newsletter for the full report, out Friday. We discuss: (00:00) Introduction (06:02) A New Player in Defense (10:47) Innovations in Subsea Technology (19:44) Product Categories and Market Applications (22:02) Competitive Landscape and Market Positioning (28:04) Regulatory Challenges and Industry Barriers (32:54) Building Trust in Defense Contracts (36:44) Anduril's Disruption in Defense Tech (38:50) Competitive Analysis (42:06) Future Growth Prospects (46:59) Management Insights and Leadership Transition (53:53) Financial Projections and Market Positioning ***************************************************** JOIN OUR EMAIL NEWSLETTER AND CHAT COMMUNITY: https://chitchatstocks.substack.com/  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* Fiscal.ai is building the future of financial data. With custom charts, AI-generated research reports, and endless analytical tools, you can get up to speed on any stock around the globe. All for a reasonable price.  Use our LINK and get 15% off any premium plan: ⁠https://fiscal.ai/chitchat  ********************************************************************* Portseido is your best portfolio tracking & reporting solution that helps you track all investments in one place. We personally use the software to track our portfolio returns across brokerage accounts. Try it for free today: https://portseido.com/?fpr=ryan63 ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. China is on the verge of becoming a world-class submarine power with new technology and a bigger, better fleet that is gaining on the U.S. and its allies, spurring a new undersea arms race in the Pacific that is pushing the U.S., which stations about 60% of its worldwide submarine force in the Indo-Pacific, and its allies to bulk up their own underwater fleets.

That is a quote from a Wall Street Journal article. This is the Chit Chat Stocks podcast, a podcast that helps you discover your next great investment. And today we have one of our monthly research report episodes, and Brett is going to be talking about a hyper growth, small cap defense stock. That's why we mentioned the Wall Street Journal quote there that is up 10X in the last three years. Before we get to that though, if you are listening to this episode for the first time or the show for the first time, please go ahead and follow Chit Chat Stocks wherever you get your podcasts, whether that's Apple, Spotify, or anywhere else. That will allow you to never miss an episode. And you can subscribe to our newsletter. It's free. The link

will be in the show notes. That's going to have all our charts, financials, and evaluation work, any additional context you might need if you're interested in this company. But without further ado brett what company are we talking about today and how did you discover this what intrigued you the company is kraken robotics and it is listed in canada and the united states uh two various ticker symbols there but both are highly liquid and it is a company operating in the subsea defense domain and as listeners know for the last three years unless you've been hiding in iraq defense spending for various reasons, geopolitically, different wars going on, has increased from just absolute spending and the urgency of importance of modernizing defense for the

United States, Europe, its allies, including Australia, Japan, Taiwan, what have you. And Kraken Robotics should benefit from this. For a little context, I think we should introduce why this is such an important topic for the United States and their defense spending along with their allies is, you know, for people, I guess this is a frank way to look at it, but you can think of it from a defense and military standpoint as the United States is somewhat of a global empire, but they do not actually control physical land. They really monitor and control, you know, the sea, underwater, airspace and outer space as a way to get people to get on their side and go with capitalism. It goes back to all the post-World

War II stuff, but we're not a history podcast. We are discussing Kraken Robotics and why they're going to benefit from the increase and modernization of subsea defense spending for the United States military, specifically technological innovations such as unmanned underwater vehicles, or what we might call UUVs. For more context, if the United States, say, loses control or domination over one military domain, for example, to someone like China or Russia, they would lose leverage in negotiations or working to protect their allies, stuff like that. Over the next 10 years, the United States is slated to spend $214 billion, again, $214 billion just on submarines. That, I think, is more than probably maybe close to every other

country combined. If we look at second, it's Australia at $53 billion. Third is China at $37 billion. And the reason the U.S. is going to be spending this much money is mainly to maintain a subsea presence with nuclear-armed vehicles. And given all the technologies there, they're done trackable for potential combatants and help to make sure people aren't doing things that other countries might not like. So given their strategic importance here, it is clear that the United States and its allies are going to invest whatever it takes to make sure it maintains subsea dominance. If we go back to Kraken Robotics, they are a stock that is and has benefited a lot from this trend, specifically with the UUV technology. Its revenue has grown at a 50%

annual rate since 2015. While its stock, as Ryan mentioned, is more than a 10 beggar since going public, and I think up 10x in the last three years as of this recording. They are a supplier of batteries, sensors, and mapping solutions for subsea systems, services, products, what have you. And I believe after doing this research that they are positioned to take advantage of more and a huge catalyst of increased spending on advanced and modernized subsea systems. I think that's probably the introduction that we need. It's a totally different market sector than listeners are probably accustomed to. It was pretty new for me researching this. So it's not the typical introduction to a show for the listeners.

But I think that is important for understanding this. Okay, look, the United States, Japan, Taiwan, Australia, European nations, they spend a lot on technologies and military applications for underwater systems. Yeah, on this podcast, we typically talk a lot about software stocks or consumer applications. Financials, yeah. Financials. It's not often that we talk about very advanced engineering and manufacturing companies, but this one has seen a huge surge in revenue and adoption from customers. And for all the listeners out there that might be intimidated by some of the technical jargon, don't worry. Don't worry.

I am with you. Brett here is our resident engineer. He is a mechanical ex-engineer, I guess. I've been out of practice for a while. I will be the layman. So if he goes too deep on any technical jargon, I'll be sure to reel him back in. But let's start by laying the groundwork. Why is operating underwater so difficult to begin with? Right. This is what makes technological innovation so important for this sector is if you're, for example, 6,000 feet under the ocean, you're facing more than 2,500 pounds per square inch of pressure or PSI. That means if you are a human or an animal or anyone that is used to operating at above water, which I think has, well, it's just atmospheric pressure, but I think it's 15, whatever the number is. 14.6, I believe.

there you go you look i don't know why i have that number in my head but i think yeah that's it's stuck in a lot of people's brains so if you're used to operating at totally different pressure this is going to feel extremely heavy and you would you know die if you were under there without any sort of protective equipment and this means if a submarine is not built properly it will implode violently under deep sea pressure if we remember the famous titan submarine being the most recent example that they were going after to explore the titanic i think and the systems weren't built properly and unfortunately everyone passed away and there's also the fact that if you're under in the deep ocean it's pitch black it's impossible to see through radar systems any

sort of video tracking technology are impossible to use this is why submarines use sonar or sound systems to try and track objects in the ocean but it's still really really difficult it's not like you can go, all right, let's post up a camera and we can see what's going on. If there's no light, you're not going to see anything. The deep ocean out there is so mysterious that things like whales or other animals that you would think that humans would be able to track, especially with all the research money spent on that, you barely know what's going on. For example, I thought this was a fun fact. There's only been two blue whale births in history that have been seen by humans. uh there's a it's kind of an anecdote i'm not sure if it's exactly true but i think it maybe

it's it would be a good debate that humans know more about outer space than they do what goes on in the deep ocean or the mariana trench but this if you look at it from a crack and robotics standpoint or a company standpoint or the the military standpoint there is a huge room to invent and innovate on new technologies to circumvent these issues, get past these issues, and finally fully understand what is going on under the ocean in the subsea domain. And that's what I think Kraken Robotics, the United States military, Andral, other defense contractors, and their allies are trying to work towards. And that's what gives this industry, as the defense contractors kind of get kickstarted and inspired maybe given the, all the geopolitical issues out there right

now to work quicker, modernize all that good stuff. There is a huge opportunity to innovate and finally operate under the ocean with full autonomy. Yeah. And given that quote that we kicked the episode off with, Brett just alluded to it. There is sort of a defense spending quote unquote super cycle going on at the moment and a lot of that is just related to all the geopolitical events and i guess wars uh occurring right now it's weird to talk about on the podcast that that's what's inspiring the spending but it is i mean look at some of the european defense stocks out there the budget proposals for increased spending that could flow through to other countries as well and kraken robotics appears to be in a spot to i guess maybe somewhat

unfortunately for humanity, reap the benefits or at least receive some of the spending from that super cycle. So let's go through their actual solutions. What does Kraken Robotics provide? All right. On a wider note, Kraken Robotics motto is to transform subsea intelligence. I think that's a good motto for them. It kind of explains exactly what they're targeting, what their goal is to provide for customers. They have three different general product categories that they sell to both commercial and defense customers, but mostly defense customers. First and most important are sub-C batteries. These are the C power batteries brand, and they have 200% greater energy density and 46% weight reduction compared to the next best option. Don't remember those

exact numbers. It's just what matters most for anyone that knows the battery industry is energy density and weight. Those are your killer features. So using a proprietary recipe, It uses something called polymer encapsulation instead of, I think, an oil-based one for the competitors. They are currently beating any competition for underwater batteries and improved performance. I mean, if it's 200% greater energy density, 46% weight reduction as of now, you can be under the ocean longer. You can have more efficient design for the subsea vehicles that they're selling to. So you are able to sell at a higher price, still provide a better value to these customers that are building the UUV solutions.

And the most vulnerable time for, say, a subsea military vehicle is when it comes to the surface because then it's exposed and anyone can see it, meaning the longer a vehicle can stay underwater, the better. So that's what the customers want. And given the better weight reduction and energy density, they can be the premier provider for subsea batteries now the second one ryan follow up there yeah i'm gonna pause you frequently for all our non-engineering folks that are listening who are kraken selling these batteries to primarily is this all u.s government general dynamics primarily or who else would it be okay

yes so that is a good question uh because there might be some confusion there they are not generally a contractor that is selling to the military. They are a subcontractor for other defense contractors building solutions. We're going to talk about Angeral and their partnership later, which I think will further give detail on this. But they have, say, subsea batteries. And then what we're talking about next year is their sonar systems. You sell these systems to an Angeral or a Boeing or a General Dynamics, and they're building their own UUV system. When I talked to the investor relations at Kraken Robotics, they said that early on in their life cycle, they were thinking about building their own UUV,

but they realized that they could be better as the key subcontractor. I know we're using the word sub a lot, subcontractor for these systems, products, and services that the subsea general defense contractors are using. Does that make sense? Yes, it does in terms of the supply chain there. When I think about a battery, I think about a Duracell AA battery. These, I imagine, are much larger. So this is manufacturing huge batteries, correct, that are taken up? Somewhat. I think part of it is modular, where they can kind of scale them up, almost like a battery that would be used on a tesla where or any sort of electric vehicle where if you're using the same technology for your um well why i can't think about your sedan versus a

truck you can kind of scale up to a larger battery um but what's important is the fact that they need to work underwater which again given what i talked about the high pressure and the fact that it can't leak right you can't have water onto a battery system it's it's similar in a way to how you would use it for an electric vehicle but there's way more complications because it needs to be operating underwater with no human intervention with all that high pressure in a totally different system okay last question on the batteries and then we can move on are these like customer comes to them and wants a custom-made battery or are they manufacturing many of these and it's like big bulk orders or they can you know customers can come and buy them and they've already made

them do you know i it's a specific type of battery they have this one type that they sell but when they're working with customers i the sizing and i think how it fits within and we'll have pictures in the newsletter for anyone that wants to visualize this you have say a uuv which is an unmanned submarine there's a specific size that an andrew or boeing or general dynamics is making it at so they have to fit the batteries within that so i think just the way they scale it up given the modular solution there versus the size that that customer needs and how it fits into that they'll specify for that but the core like how the actual battery is built it's it's the same i believe every time okay second product category what is it so this one is called

synthetic aperture sonar you don't need to memorize the name it's just sonar systems and this is using what they call side scanning technology which i guess they don't just call that it is side scanning technology they are able to image and map underwater areas at a much better rate than historical solutions so you can get up to two centimeters zoom on objects up to 200 meters per side and i think there you can do this from a decently sized distance away so think about um of it like an improved pixel rating for underwater mapping this is something that's very difficult in the past again you're going through water it might be dark it's blurry it's much much harder than taking a photo from even like a satellite up in orbit. So Kraken will sell these what they might

call SAS products, which is synthetic aperture sonar directly to customers, or they will perform mapping contracts for their services segment for these customers using their own SAS systems. And then what's fascinating about this is they can also image the ocean floor below it up to a few meters so again that i thought that was kind of cool i didn't know that was possible and in the newsletter i'll have a link to a youtube video there's plenty of youtube videos out there that can show how this is exactly working but it's important to note that again like with imaging on land the better quote-unquote pixel rating how much you can zoom the detail the better detail can get the better and that's why they win contracts with these systems so the customer base for this

second product category i imagine is maybe there's some overlap but there's also probably it applies to other industries like you mentioned offshore energy there's probably some oil companies or anyone that's drilling on those oil rigs out in the ocean could benefit from this am i thinking about that right that is correct yeah so there will be anyone that wants to either map monitor or explore anything underwater so offshore oil energy uh you even have some i think this is probably a small part of it but marine researchers marine life researchers stuff like that that want to use that to try to find something underwater people that are exploring for shipwrecks stuff like that but again it is overlapping a lot with and what will matter over the long term is defense

you have a country and then these ones they might sell directly to countries or you might have a defense contractor under the same contract maybe for uuv that is going to build something that utilizes these sas systems and it can help not only have an object underwater or have a uuv be underwater, but the ability to start mapping the deep ocean. Before we move on, we want to talk about our friends at Interactive Brokers. Interactive Brokers is our favorite brokerage platform. They make it easy to buy stocks, ETFs, options, futures, currencies, bonds, and more, all from a single unified platform.

And Interactive Brokers allows you to maximize your returns by minimizing your costs. They offer zero commissions on U.S. stocks and low commissions on international securities. They aren't cutting corners either. Interactive Brokers, one-of-a-kind smart routing technology, gets you the lowest price possible in 36 countries and 28 different currencies. Interactive Brokers is our home for stock trading, and we wouldn't go anywhere else. If you're getting serious about investing, it's time to upgrade to a broker that you can trust. Head on over to IBKR.com. Restrictions apply. Interactive Brokers is a member of SIPC. okay let's talk the third product category here and then i have a follow-up question all right so the third one and this is one that is a relatively new product line and it is 3d mapping systems as

opposed to you might think oh we were just talking imaging so the sonar the sas is 2d images but these 3d mapping systems is what they used uh for a company they just acquired called 3d at depth They actually still keep that branding. So it's technically a separate company. If you can check out their website and they do LIDAR mapping underwater. To use an analogy, we've, I guess, used automotive a lot as an analogy here. If the batteries are the electric vehicle batteries are the same, you know, that's the same type of system there. And then you have the SAS, maybe that's your map, but the LIDAR is something like a Waymo or another self-driving system would use to map their existing environment. I think this is the reason they acquired them is this is the next step in underwater tracking, creating 3D scans of a systems. They call it, you know, digital twins. We've talked about four with energy engineering software providers to help really what's monitoring what's going on under the ocean with your assets. This one has actually been more of a commercial provider.

for an oil company, for example, wanting to accurately monitor its offshore assets all under one software program, managed in the cloud, all that good stuff. Now, they're going to try to sell that more to military solutions over time, but they just acquired them earlier this year and, you know, TBD on that one.

Now, as a whole, before we go on the next section, Kraken is not necessarily selling these products or services to traditional submarines or the traditional subsea systems that have been around for many decades. These systems have legacy contracts that are hard to rip and replace, and they're generally not powered by electric batteries. They are looking to win new contracts for new types of research for military applications and commercial applications, and specifically in that UUV space, as we'll talk about UUVs, the unmanned underwater vehicles,

essentially the drones of underwater, a submarine of some kind that doesn't have any human operating with it. They are growing really rapidly and seem to have a huge runway ahead of them. Okay. I'll have some follow-up questions on the competitive landscape side of things. But as far as the three product categories that we just talked about, do you know what the rough revenue splits are? Is there one that makes up the lion's share of the business at the moment? So they don't specifically disclose it. They do disclose product versus services, but there is overlap from these three categories. I would hope over time they would change it up,

although there is, again, a little bit of nuance for different sensors they might sell. But I tried to back into it. I think I got a decent estimate. Let me try to figure it out. Yeah, okay, I have it later on here in the newsletter. They did, and this is USD figures. Sorry for the Canadian listeners out there,

but we're using USD. We're a US podcast. They are guiding for, on the low end, at the current exchange rate, $87 million in total USD revenue this year. And given their capacity that they've talked about for batteries, which is that max capacity for their manufacturing right now, and given what they disclosed for 3D at depth, I believe that 3D at depth does about 16 million USD in ARR, although they're not going to have it for full 2025 on their actual income statement. I believe $36 million comes from batteries revenue. Again, that's a rough estimate.

and then $39 million from the SAS sonar division. SAS is the oldest. This is their original product. This is the one that was kind of the innovation that started the business itself. So it's the older one, but, and it's larger, but it's not growing as quickly. So I say 3D at depth, smaller part of the business for sure. And then I probably generally equal mix of batteries versus SAS, but batteries are growing faster. Okay. I think when it comes to a advanced engineering type company or advanced manufacturing type of business, there is obviously the barriers to buying the stock oftentimes is understanding the product itself. But on top of that, it's understanding how and where does it fit within the competitive

landscape because it's always it's easy to hear about a product and think wow that's revolutionary when you're not familiar with the industry and then maybe it's oh someone copies it tomorrow exactly so are there does kraken robotics have any specific competitive advantages within those product categories that you talked about okay and just uh for listeners to know that maybe you're listening for the first time we when looking at a stock or at least i do specifically i think ryan has similar framework. We want to look at, you know, potential growth, competitive advantage, which can give predictability for earnings power in our valuation estimates. We want a cheap price in relation to whatever they can earn in the future. And we care about management. So competitive

advantage is very important to us. And generally technology is not, that doesn't give you a competitive advantage on its own. But if we look at, let's go take first sonar and sensor systems, they do have Kraken does have direct competition in this space, namely from Northrop Grumman and what it calls its micro SAS product. I did some research into both of them. They essentially look like the exact same systems. Uh, does that mean this is a wide mode business for Kraken? I'd say no. Kraken may have an edge in given that they focus over, you know, compared to a large defense contractor like Northrop Grumman, as well as Northrop Grumman actually building their own UUV products, their own defense products that would actually probably compete with the Sonar

customers that they're selling to, where also that Kraken is selling to. But at the end of the day, these are very similar products. However, reportedly, from what I've read, Kraken is able to sell or is willing to sell its Kraken SAS system at half the cost of competitors like Northrop Grumman, while still maintaining 50% gross margins. Perhaps maybe there's less bloat there that is making them more efficient. But as a whole, I like that part. Of course, we don't like that there's competition as an investor. But I would define this as a good business, not a great business.

This is not something any startup can just go, oh, we'll just copy this product. I mean, it's an extremely hard engineering problem to solve. But it's not like they have a patent or an IP on it. Yeah, that makes sense. It does – it is somewhat concerning that there seems to be sort of product parity, but the fact that they are able to still maintain 50% gross margins at a lower cost is promising. And a long history of selling. A long history of selling and winning contracts. So I guess my question is kind of an unrelated question, but you mentioned that they're a subcontractor and not specifically selling directly to the government. Is there like regulatory clearance needed for the employees at Kraken?

Is there any sort of like, I guess, barriers to entry to selling these types of products from that perspective? And I should say they do sometimes sell directly to militaries. It might be they announce stuff as a part of like, OK, they might specifically with the sonar solution sells to a military. to they might use it to do defense at a base but with the batteries i think they're mainly a subcontractor honestly i'm not sure what do i know of researching the defense industry as a whole is the fact that you need these regulations you need all these certifications you need your workers to pass the uh what is it uh national security clearances yeah the fact that you can get embedded within these contracts whether it's in air army navy what have you that can get you

locked in. And as we'll talk about later, that can build that competitive advantage over the long term. Okay, let's talk batteries. Who do they compete with primarily for subsea batteries? Right. If we want to do a spectrum of like technological modes, and at the one end is the ASML EUV systems, and at the other end is maybe a Duracell battery, I guess that could probably be a longer one. Maybe subsea batteries are closest of all their products to the ASML quote-unquote technological hurdle moat uh we look at their latest earnings release they said that subsea batteries grew significantly so they're growing much faster they had their highest quarterly revenue to date this was q2 2025 but that was offset by their sonar related revenue

so this is the business and the sub category that they're doing the best in and if we look at just the actual uuv sales a single ghost shark from andrel which is their uuv system will have two million dollars worth of kraken road batteries plus more revenue from sensor sales added on top if we look at andrel they just want a 1.12 million dollar contract from the australian navy for the ghost shark as well as just exploring opportunities to sell to taiwan and all these given that they're the subcontractor here will utilize Kraken batteries. I would expect other navies to follow suit. And there's plenty of opportunities out there for people to utilize something like a UUV to monitor bad actors out there. For example, you have the South American countries

like Argentina and Peru that are getting, I would say, upset, rightfully so, that illegal Chinese fishing crews are decimating all the fish outside of their waters. And if the Australian navy for example wants 211 e5 ghost sharks you know that the u.s navy is going to want 250 that's just the way it goes and this is not to say that kraken has any ip protecting its battery technology it simply out innovated the competition and so far they haven't been able to figure out how to copy their polymer-based sealing system should that give you confidence in an emerging moat no, that would get me nervous. I know Ryan would probably be nervous just banking on that as a whole, but I think two things should help them maintain their edge and subsea batteries for at

least the next five years. One, most battery makers out there are focused on the larger electric vehicle market. The niche players competing with Kraken have spent years trying to catch up. They haven't. There's not that much competition out there. Why would that change in the next few years? You have someone like Panasonic, Tesla, all the big East Asian players. they're not going to go after this two three hundred million dollar total addressable market that may materialize within a few years within uuvs it just doesn't matter to them now third kraken does have the ability now at a much larger scale to increase its r&d budget which will hopefully give them the opportunity to improve on their subsidy batteries and further get them

past the competition they've gone from under one million dollars a few years ago which i say is highly efficient R&D spending to get all these innovative solutions out there. And they're now up to $3.3 million in USD over the last 12 months in R&D. I think the moat in defense doesn't come from technology. Even though a lot of these companies are really innovative when it comes to technologies and building all these new systems, making these incredible engineering problems or solving these incredible engineering problems. But the moat comes from and why companies like Lockheed Martin, Northrop Grumman have been incredible stocks to own is they get locked into contracts with defense programs such as the Andrew O. Ghost Shark.

Contractors and militaries are not going to switch to another battery product on an existing contract if one was ever invented. And I think this gives me confidence in the sustained revenue growth for Kraken's battery segment over the next three to five years. Like just for example, think if you were someone copied Kraken's product would they give it like again these this is the U.S. military they're not focused on profitability they're gonna stick with Kraken because they're the best provider Andrel's gonna stick with them there's no reason to switch except if a whole new product category comes out there which is what Kraken is doing to the legacy players with electric batteries and UUV systems.

Yeah, a couple of follow-ups there. There are countless examples of once an organization is a big supplier to the US government, the government sticks with them as their supplier. Specifically the military too. Yeah. And part of that is there's so much clearance, there's so much red tape just to get deals done

on that side of things. but also there's just an element of trust i think you see that probably with boeing you see that with general dynamics uh northrop grumman probably as well i don't really know that business yeah the once you've got that plug-in there's like decades worth of trust that have been built up second thing there you mentioned the anderil go shark so anyone that doesn't follow this industry anderil is a yeah which is probably every listener if we're being honest no one really this is such a niche place yeah andreal is a they've kind of made waves no pun intended in really kind of the entire private markets generally but it's a defense

tech startup that was founded by palmer lucky who was the former founder of oculus i believe and he left meta or facebook at the time because of political i think differences uh i believe he like spoke out about some of some said something that didn't resonate yeah yeah just say 2016 2016 and he liked trump uh at a silicon valley company things ended up yes and so he ended up leaving he started andrew in 2017 and today they have a private market valuation of 30 and a half billion dollars they're on a series g funding round now that one to me makes a little more sense having that many funding rounds because it's a very capital intensive business so oh yeah and their whole their whole model which is why they've been able to disrupt some of the existing defense

contracts is they started building projects without any contracts so they started building their new technologies with a giant risk saying look you haven't bought you haven't said you're going to buy our solutions yet but we're going to prove to you that we can innovate and be better and that's the risk that's needed to take to you know try to wiggle your way in to the existing players which are still doing quite well and you can't do that without having a very rich founder most likely which in this case they did so but that is also to say they are they heavily financed by Venture Capital, and there is a ton of allure in Silicon Valley and the VC world generally about being involved with Anduril. The Anduril Ghost Shark, it sounds like, depends heavily on

or relies on the batteries of Kraken Robotics. That's a pretty nice customer to have because chances are you can kind of hitch your wagon or whatever to Anduril and you're going to ride the coattails of their success as well if you can continue to be a unique provider and specialized provider of a very valuable piece of equipment in the UUVs. Last one here, I don't think we talked about the imaging services. What's the competition look like there? This episode is presented by our brand new partner, Port Sido. Do you know what your actual investment returns are? Well, if you're like me, then the answer is probably no. And that means you need to try Port Sido. Port Sido is the ultimate portfolio performance tracker. With Port Sido, you can

easily aggregate your various brokerage accounts and instantly see your actual investment returns. That includes all your investments too, stocks, ETFs, even crypto, if that's your thing. You no longer have to guess what your returns are. With Port Saito, you can find out in minutes whether or not you are actually beating the market. And that includes a dividend tracking dashboard and even tracking of short positions. I have been looking for a tool like this for a long time because I was sick and tired of tracking it manually and Port Saito has finally built it. If you want to find out what your real returns are, check out Port Saito. The link will be in our show notes. So when looking at imaging, this is the 3D at depth company that they just acquired.

They've owned this company for less than a year. So we're still figuring out exactly how it's going to fit into the business, but it's mainly used right now for offshore energy and commercial subsidy projects. Kraken believes it's going to cross sell to its military and surveillance customers, but it would not be bundled with batteries and sonar for UUVs. At least I don't think it's going to be bundled or needed for UUVs. So there's almost an entirely different segment and that whole getting stuck within the defense contract or moat we talked about is not going to be part of this business yet, or it's not part of the business today. I don't think this is a bad business to own yet, though.

And I think it may have a moat from a different perspective, which is the switching cost that comes from using a cloud-based analytics or software program to manage your underwater systems. If you're using an existing one, I think it's going to have similar switching costs to engineering software. your employees get trained on the software while data gets accumulated using the systems every year making it more of a pain to switch the longer you use it does that make sense ryan i feel like that's a similar analogy here you're getting it's the software layer plus i guess you have the

mapping stuff as well that might have some hardware associated with it but it's going to be managed within your software systems you have someone trained on it and that switching cost grows year after year after year after year, the more you are a customer. Plus, it looks to me like Kraken got a steal of an acquisition price. I'll lay these numbers out because I think it kind of shows that maybe there's an opportunity for them to go after more of these players within the subcontractor defense space and the sub defense space. They spent $17 million on 3D at depth. And according to their latest conference call, management is expecting around $5 million in quarterly revenue. I believe when they referenced that, they're saying Canadian dollars.

So let's say given the current exchange rate, that's $4 million per quarter USD. And the numbers from 2024 track closely with these projections. So the company has grown revenue at 20. This is a quote from the acquisition, a news article from there. The company employs 56 people and has grown revenue at a 20% CAGR over the last three years and reported 2024 unaudited US GAAP revenue of $14 million gross profit of $8.4 million for a 60% margin and $1.1 million of operating income. I'd say 56 people, $14 million in revenue growing 20%. That's a pretty efficient startup. And they acquired them for around one times revenue for a services business with, again, 60% gross margins, durable history of revenue growth, and a ton of cross-selling opportunities

for military and defense customers. I like this acquisition price a lot, and I like this business, and I think it can be a solid one for them to own. Yeah, I guess optionality here. Here's the pitch to small cap investors. Sub-C, sub-contracting roll-up? Yeah, that's what this is.

That's what Kraken might end up being. And they've talked about, for anyone, the listeners, they have talked about making more acquisitions in this space. So watch out for that. It's an opportunity or risk, but if they can be like this one, I think that could have some promising ways to build up their bundle of solutions

as the sub-C subcontractor. And as on a whole, if we're talking competitive advantage, I don't think Kraken has a wide moat today, but one of the themes we talk about on this podcast and on the newsletter is the fact of a company having a potential emerging moat using that Buffett analogy of can the moat widen over the next five to 10 years?

If we look at Kraken, they have a market cap of about a billion dollars today. It was only $15 million before the pandemic. This was a tiny micro cap company. I would not expect any micro cap company to have a dominant competitive position, and it's only been a couple of years since then. But I think there is a path to building a competitive advantage over the next decade through three ways. One, using its lead in battery technology to lock in long-term UUV contracts. Two, bundling batteries and sonar systems to sell to UUV systems. And three, developing and acquiring new subsea technologies to increase its value as a seller to defense contractors and directly to the militaries. I think that can build a nice defense moat

over the long term yeah i'm looking now and this is since 2017 a 50 compound annual growth rate in the stock price now that is off of a very small market cap yeah yeah there's been dilution there's been dilution so that that's what factors into it even more yeah it was a 10 million dollar canadian uh market cap in 2017 today like you said 1.4 billion canadian uh probably closer to 1 billion usd let's go let's let's tie it all together here so we've mentioned the different product segments their revenue the dynamics within each one and the competitive landscape what do you think the future looks like for Kraken and can they continue to grow as they have over the last four or five years? Yeah. For the listener, this one will hopefully

these last two sections here, last three will be shorter. I think as we kind of go through the numbers, it's going to be a lot more simpler. The hardest part was actually understanding the business and the competitive dynamics. So 2024 Kraken had 63 and a half million dollars in revenue. And in 2025, at the low end of its guidance, it's going for $87 million. Now around $12 million is going to be inorganic revenue from 3D at depth. But according to their current or their latest press release, the batteries business is what is driving the growth here while SAS, the sonar is not. So I assume the rest of the growth of their projection from 63 to $87 million is coming from sub-street battery sales. And Kraken's growth is going to rely on signing

UV contracts. I wrote here with the US Navy, that's actually not correct. Again, what we talked about is with the defense contractors, such as Anduril or others, there's like 10 others out there making UVs, Anduril is just the fastest moving. And remember, a single GoShark sale to comes with $2 million worth of batteries. This market is still in its infancy today if they're only doing $30, $40, $50 million in total battery sales. In early September, as I was researching this, Kraken announced a $13 million contract for SAS and subsea batteries. The orders are from customers based in the United States, Norway, and Turkey, and include an order for 10 SAS from one customer. The Kraken SAS and C-Power battery systems from this order will be integrated on

four different types of uncrewed underwater vehicle platforms ranging in size from small class to large class. So you have Angelo, Boeing, General Dynamics, Huntington Ingalls Industries, Northrop Grumman, Lockheed Martin, all developing UUV systems from small to extra large. And that is only in the United States. You have Kongsberg, Saab, Atlas Electronics, Accel, and others are working on UUVs in Europe, not to mention Australia and Taiwan. The budget from the United States Navy on UUVs is small today. It's mainly focused on research. Now, Australia has been at the forefront of the industry, maybe because of its central nature in the Pacific as a U.S. ally. Not exactly sure, but they have been. They signed a recent deal with Andrew for

over a billion dollars, and you could really even sense this is where you had the Palmer lucky influence there. You could sense the passive-aggressive tone from Andrew in the press release, essentially telling the U.S. Navy it needs to get its act together and start building up its UUV technology and signing contracts. And I think given that sale, given what we're seeing geopolitically over the last three years, there may be an inflection coming in UUV spending. Budget proposals have called for increased spending on the technologies. And while we don't need to go through all the exact details of budget reconciliations. What is important is that there is a long-term trend of higher spending. And with by far the best batteries, Kraken should win

most, if not all of these contracts, even from companies like Northrop Grumman that it competes with Sonar. And Kraken believes it has a pipeline of potential contracts worth $2 billion. And that's not each year, but that's cumulative right now. And with revenue of under $100 million over the last 12 months, that's a giant opportunity. Now Kraken is investing ahead of this growth. Today, it has maxed out capacity, its current battery plants, which can do about $36 million in revenue in USD at current exchange rates. By the end of this year, Kraken is going to open up its new facilities for batteries that have 3x the capacity of current levels. And depending on pricing power and obviously the exchange rates because it's a Canadian company, Kraken could

have the ability to pump out $150 million worth of subsea batteries in 2026. They're not going to fulfill that demand overnight, but they're increasing capacity greatly to catch up with the demand that's coming from these defense contractors. And I really imagine a world where there are thousands of UUVs used by the various militaries, both large and small, and an average revenue of $2 million per UUV and at a rate of 100 vehicles produced per year. That's all you need to suppress Kraken's upcoming facilities expansion in regards to battery sales. And that would be 5X, 6X the revenue of today. So long story short, there's a huge runaway of growth ahead for Kraken and UUV batteries, and it has no relevant competition today. That's what I think

should get investors the most excited about this company and why, well, we're not the first one to this party now that you know we don't own the stock yet as of this recording but that's why the stock is up so much and why investors are so excited okay i have some follow-ups there but we got to jump to management i think in summary it seems like there is going to be a surge in spending at the contractor level for uuvs which because of the military procurements yeah ultimately all but inevitable yeah yeah ultimately going to benefit kraken let's talk about management who runs the company today what do you think of them okay well i've never met them i've talked to the ir team um they actually outsource it since they're a micro cap and i think they may go to

their own ir team not sure yet but it's a outsourced ir team called sophie capital a nice guy runs it i got to chat with him so if you want to talk with them go talk with him he'll give you some good info and answer any questions he can or that you may have. What I can really go off of here are anecdotes, their track record, and the small amount of public investor relations they have done because they only just started doing conference calls, which that was nice, good timing here, but they didn't really do a lot of those before. And given it's a Canadian company, they actually have less disclosures than SEC filings do for the United States. So it was actually much harder to find information on this business. But given their financial performance and the

successful acquisitions i mean i really like the price they paid for 3d at depth i'm pretty pleased with the management's track record like that box can be totally checked and we look at their uh founding story carl kenney founded kraken in 2012 with the goal of commercializing high-resolution sonar which is what led to sas he grew up in newfoundland on the atlantic coast and had a long history of working in technology and software which made him a perfect fit of someone who you know, he was an ocean guy, I guess. He loved the ocean and he also loved technology and software. Boom. That's why he wanted to start this business. He retired as CEO in December of 2022. And then CFO Greg Reed took the reins as CEO. I think unfortunately, Carl Kenny was having health

issues at the time because he passed away earlier this year. I think that's probably why they had to make the transition. Now, when Reed took over, Kraken had a market cap of just $81 million. dollars. And that was in early 2023. And today it is closing to hit one billion dollars. So pretty good performance so far. Obviously, the stock price has done quite well. And from my it looks like Reed has successfully navigated Kraken Robotics from a micro cap to a hyper growth small cap company that is going to keep emerging as a player in this defense space. He has straddled the line of rational capital allocation and innovation despite losing their founder, which is probably extremely hard to do. And acquiring the team from 3D at depth will also give them a

boost on their R&D spending. Now, from what I've heard, what people said, Reed is a tireless worker and frugal. He flies coach, which I think is a good sign. That's always the best indicator, right? That you have a management team that's not going to waste your money as a shareholder. and the board of directors tells him they need to pay him more. I think that's much more palatable than the opposite when you have an average large cap mercenary CEO from McKinsey. They go, why are you getting paid so much? What are you wasting money on? What are the perks you're getting? I think it's a good side of the CFO culture that he's bringing to the executive suite. I do worry though about Reid's experience leading a public company that may turn into a

multi-billion dollar market cap sometime in the near future. He has plenty of experience in accounting and finance, giving his bio, but that's it. No large-scale roles as an executive before. Maybe they will pass the torch to a seasoned defense contractor executive and have to move back to the CFO at some point. I'm not sure. I don't know what's going to happen, but that's something that they definitely will need to navigate. You went from a tiny company to now a hyper growth company that may acquire more startups in this space, that's going to be something that's much, much more difficult to manage. But overall, I'd say he's done a great job. And even though the company has funded growth through share issuance, they did $115 million in

whoops, I said 2026. There, that's actually 2025. They can't do something in the future. They did $150 million earlier this year at $2.66, $52 million in October 2024, and $17.5 million in April 2024 to raise money. Even though they've done all that, their per share value has grown a ton, I believe, over the last five years. Revenue per share has grown at a 36% annual rate since 2020, per the fiscal AI chart I built. and this is understating growth as revenue is going to be weighted to the back half in 2025 gross margins are expanding um there's just really a lot to like with how this management team is executed and as i've noted in the newsletter i'm not going to read this full quote for this guy's bio because it is quite extensive they just brought on to the board of directors vice admiral

Michael J. Connor, who was the old, he worked 35 years in the United States Navy, and he was, I believe, the head of the entire Allied Submarine Command. So that's a good guy to have on your board of directors. And he's actually the CEO of another startup in this space called Thayer Mahan. Maybe they'll acquire them, who knows. But I think that's a fantastic person to have in your corner. They've really expanded the board of directors to be a good, you know, defense company, a board. And it seems like Reed has done extremely well taking over this role from CFO to CEO. You have the founder passing. Kraken Robotics hasn't missed a beat. All right, folks, before we move on, we need to tell you where we get our financial data. Fiscal.ai. Fiscal.ai is the

complete stock research platform for fundamental investors. I use the platform pretty much every single day. You'll see the charts on our podcast and you'll see it in our newsletter. This is our one-stop shop for stock research. They've got up to 20 years of financial data on all companies globally, including company-specific segment and KPI data. That means Amazon AWS revenue, SoFi's total members, Google's paid clicks growth, and literally millions of more data points. They've also got earnings call transcripts, ownership data, company-specific research reports, and much more. If you want complete financial data at your fingertips, then you need to check out Fiscal.ai. And if you use our link, fiscal.ai slash chitchat, you will get 15% off any paid plan.

Again, that is fiscal.ai slash chitchat. The link will be in the show notes. Yeah, I imagine it's fairly rare to see an engineering company go from micro-cap to billion-dollar market cap with a non-founder in the CEO seat, especially one that's non-technical, one that's primarily finance-oriented. Right. However, if you can allow your teams to run autonomously and you give them the power and the reins to kind of do what they need to do while you take all the other work off of the company and you're kind of managing the finances and giving them the resources they need, I could see how that works. And in this case, it totally has worked. And like you said, when you have someone with an accounting background in the CEO suite, sometimes there's a little more shareholder friendliness with how they spend money. It's always nice to see the CEO flying coach. And I would actually maybe continue to monitor that as they go from – as they become a more than $1 billion company, does it continue to fly coach?

True, exactly. I think you can fly first class if it's helpful for the work you have to do on there. Let's it's not going to kill the budget, but I'd like the mentality from that. OK, let's start to wrap things here with what you expect financially. What sort of numbers are you projecting modeling now? And do you think there is any sort of a catalyst on the horizon? Okay. So right now, as we talked about earlier, about, I think, equal mix revenue from SAS and batteries, and then maybe just around 15%, maybe lower from 3D at depth right now, just for context

on what's the important business and what are the important business lines going forward. And I really just projected revenue growth based on my research, based on what the growth is for these opportunities or for these three categories should be based. I projected revenue after 2030 and I decided, again, this isn't precise, but I have 15% annual revenue growth for 3D at depth given the opportunity there. I have 25% annual revenue growth for batteries giving a huge inflection going on in that industry. And then I outlined 10% annual revenue growth for SAS because that's not a huge addressable market, but still a good business as we talked about above winning new contracts. Combined, that gets us to $205 million in 2030 revenue USD.

They have shown the ability to already reach 15% profit margins. I was surprised to see this looking at this fiscal AR chart. In late 2023 and 2024, they posted 15% operating margins. And now given their reinvestment to grow and expand, that operating margin has shrunk to 9.6% over the last 12 months. And it's a bit of a lumpy business given contracts can be large and just kind of how you are as a small cap manufacturer. But I do think with gross margins approaching 60%, probably won't be that much higher than that. In the 50, at least the 50 to 60% range, I think a 20% operating margin is entirely feasible. And if we do that, okay, current market cap, we do no shareholder dilution, which is probably going to happen.

Kraken would be trading at 21 times 2030 EBIT, or 21 times 2030 operating income. Were you disappointed in that number, Ryan? Yes, but I think there's a chance you could be very conservative here on the revenue growth. yeah two yeah two things i thought about is on the one hand projecting five years of 25 annual revenue growth for batteries for any business that seems in a vacuum that's aggressive but my estimate is saying that they'll have 110 million dollars in battery revenue in 2030 and due to all the defense contractors building uuvs and the momentum building within the militaries that we talked about there could be as a whole the sector could be driving hundreds of

millions of dollars in subsea battery sales across this entire sector and cracking could still be the premier provider that gets the majority of these contracts so it may be batteries revenues twice as high in 2030 i don't know but should i bank on that happening is that my base case i i don't think it should be and even with the stock up 500 in the last five years uh ryan said maybe 10x of last three, depending on where it's traded, has been quite volatile. I think there's still room for a right tail event to happen here that could turn this into a hundred beggar from the previous lows. I don't think investors should discount this probability to zero when saying, well, why should I project them to have 30, 30, 35, 40% revenue growth in batteries when that's

actually realistic that could happen. Now, the second thing that people I think should think about is a potential catalyst in the room in Andruil. Kraken is one of, if not the key subcontractor for Andruil's UUV programs. The company is aggressive and working rapidly to rearm, modernize, and disrupt the current procurement ecosystem for the United States defense contractors. They just raised $2.5 billion earlier this year and has a $30.5 billion valuation that Ryan talked about earlier. So they could use cash under stock as currency to acquire Kraken Robotics, which would give them a key advantage in the UUV space because other defense contractors would either have to go through Angeral in order to get Kraken's

batteries, or Angeral could decide to keep the batteries only for its own UUV programs, forcing the competition to go elsewhere, which right now there is nothing that comes close to their technology. This is another right-tail scenario that I think could lead to fantastic irr for investors you could imagine like a two or three billion dollar acquisition price i think something like that i mean it's not gonna be an insane premium but you could get a solid return from an acquisition that that could also come into play here and i think that's how i'm modeling it base case solid growth probably at a premium valuation but there is a chance this becomes and stays a hyper growth company that can grow what was the revenue per share growth rate

37 yeah i think that could 34 no sorry let me 37 37 yeah i think that could stick around for the next five years as well there's there's a possibility yeah i have there been any signs of interest from andrew to like have they been serial acquirers in the past well andrew acquired ghost they acquired this uuv division that's how they became a kraken customer because ghost was a customer sorry yeah ghost was a customer of kraken and then it got merged into angelo so possibility yeah yeah it's always uh nice kind of nice to have on the half chance that that does go through last question here as we wrap up the episode will you be buying the stock judging from your tone around valuation i think i have an idea

but yeah thank you for the listeners this was more of an academic exercise i think than most podcast episodes i'd say read the newsletter for more in-depth thoughts on valuation just reading through it again to get all the numbers down there and i hope listeners got something out of this because i think this is a fascinating stock but i believe things could change by friday when I released the newsletter, but I believe I'm keeping it on the watch list for now. Part of me, one shoulder is saying, this is a David Gardner rule breaker.

It's going up, so that means you should buy it. But the other side of me is saying, that's not how I like to invest. I would love for this to be a stock that fits into a, not necessarily a basket approach for a sector, but small positions that could have a ton of growth, high risk, high reward positions. But at the time, right now, I think the valuation is a little too

expensive for my blood. Anyone that found this a couple of years ago, you're doing quite well. And I would just keep holding. I mean, this business is fantastic, but I would maybe want to buy it 10 times 2030 EBIT, or if they show more momentum, the stock price goes down or something like that, macro stuff, what have you. Maybe we get a better buying opportunity right now. Unfortunately, in the last, I think, few weeks, let's look at what's up in the last month. Yeah, it's up 30% in the last month. That unfortunately has made the valuation a lot more expensive. That's because they're winning some contracts and there is momentum there, but I don't really know how the numbers work out here for a huge return over the next five years,

although i'd love to own this one yeah they're uh i guess the one the one thing to note here is that when it comes to small caps there tends to be significant drawdowns volatility and volatility so when we say it's currently trading at 21 times or 20 times what was it 2030 ebit and brett wants it at 10 times that's not out of the realm of possibility i think a lot of people We'll always assume a 50% drawdown is unrealistic and not going to happen. But I think with small caps, it's very doable. Let's look at the drawdowns right now in fiscal. They went into a 70%, then a 60%, then they were almost recovered,

and then went into a 60% again. And then earlier this year, they had a 20%. I mean, it's quite possible. Okay. I think that is going to do it. Like we said earlier in the show, if you want to seize the charts, the show notes, some of the numbers, because I know numbers over a podcast format can be a little hard to digest at times. Check out the substack. The link will be in the show notes. Also quick

shout out to our sponsors from this episode, Port Sido, Interactive Brokers and Fiscal AI. That's going to do it. Thank you everyone for tuning in. Brett and I are not financial advisors. Anything we say or discuss here on the podcast is not formal advice or recommendations. We may buy, sell or hold any of the securities discussed on this show. Thank you again for tuning in and we'll see you all next time.