Chit Chat Stocks Podcast Summary

Episode Title: A Hypergrowth Small-Cap Stock For The Defense Spending Supercycle
Hosts: Ryan Henderson and Brett Schafer
Date: September 24, 2025

Overview

This episode takes listeners deep into the world of defense contracting, focusing on Kraken Robotics—a small-cap Canadian defense technology company at the forefront of the emerging subsea defense "super cycle." Brett presents a research report on Kraken, exploring how the company's advanced underwater battery, sonar, and mapping technologies are riding the global surge in military spending, particularly as geopolitical tensions ramp up in the Indo-Pacific. The conversation breaks down the technical challenges and opportunities in undersea defense, Kraken’s products, financial prospects, and why its stock has recently taken off.

Key Discussion Points & Insights

1. Defense Spending “Supercycle” and Subsea Dominance

00:32 – 03:20

• Backdrop:
  • Global tensions, especially with China’s naval buildup, have spurred a significant increase in defense spending among the U.S. and its allies.
  • Brett points out, “The United States… 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.” [02:49]
  • U.S. to spend $214 billion on submarines over the next decade, far outpacing other nations.
• Why Focus on Underwater Tech:
  • Losing supremacy in the subsea domain would reduce U.S. leverage globally.
  • Increasing urgency to modernize and maintain dominance beneath the seas.

2. Kraken Robotics – Company Profile & Growth

03:20 – 06:30

• What Attracted Brett:
  • Kraken Robotics specializes in batteries, sonar, and mapping for underwater vehicles and defense systems.
  • “Its revenue has grown at a 50% annual rate since 2015. Well, its stock… is more than a 10 beggar since going public and I think up 10x in the last 3 years.” [05:24]
• Market Position:
  • Strongly positioned to ride the surge in global defense tech demand, particularly from UUVs (Unmanned Underwater Vehicles).

3. Technical Challenges of Subsea Operations

06:41 – 10:40

• Barriers to Entry:
  • Deep-sea pressure is intense (2,500 psi at 6,000 ft), requiring very specialized engineering.
  • “If a submarine is not built properly, it will implode violently under deep sea pressure.” — Brett [07:28]
  • Difficult conditions (pitch darkness, inability to use radar/video) necessitate advanced sonar and mapping tech.
• Underwater Exploration is Still Nascent:
  • “There’s an anecdote that humans know more about outer space than they do what goes on in the deep ocean or the Mariana Trench.” — Brett [08:12]

4. Kraken’s Product Lines

10:47 – 22:02

• A. Subsea Batteries (C Power):

  • Core feature: 200% more energy density, 46% lighter than competitors.
  • Uses a unique polymer encapsulation for underwater reliability.
  • “The longer a vehicle can stay underwater, the better. So that’s what the customers want.” — Brett [11:56]
  • Sold primarily as a subcontractor through larger defense companies (Anduril, General Dynamics, etc.)

• B. Synthetic Aperture Sonar (SAS):

  • High-resolution side-scanning tech, creates detailed maps of underwater terrain (2 cm detail at 200 meters).
  • Used both in defense and by commercial clients (offshore energy, researchers).
  • “Think of it like improved pixel rating for underwater mapping.” — Brett [15:56]

• C. 3D Mapping Systems (3D at Depth):

  • Acquired company that offers LiDAR mapping to create 3D “digital twins” of underwater assets.
  • Primarily commercial use (oil, infrastructure monitoring) but expansion into defense expected.
  • “I think this is… the next step in underwater tracking, creating 3D scans of systems.” — Brett [19:44]

• Product Revenue Split (Estimate):

  • 2025 guidance: $87M revenue (USD).
  • Batteries: ~$36M, SAS: ~$39M, 3D at Depth: ~$16M (smaller, but growing). [22:18]

5. Competitive Landscape & Moat Analysis

22:18 – 41:12

• Sonar Systems:

  • Main competition from Northrop Grumman’s “Micro SAS.”
  • “Kraken is able to sell... at half the cost of competitors like Northrop Grummen while still maintaining 50% gross margins.” — Brett [25:43]
  • Not a “wide moat,” but substantial barriers due to complex engineering and entrenched relationships.

• Batteries:

  • Strongest area of competitive advantage; few rivals focus on this specific tech.
  • Out-innovated competition with polymer-based sealing; R&D spend rising as business grows.
  • “The moat in defense doesn’t come from technology… but the [locked-in] contracts with defense programs.” — Brett [30:29]
  • Once embedded in a major contract, switching is risky and unlikely for defense customers.

• 3D at Depth Mapping:

  • Stickiness comes from high switching costs (training, data accumulation, workflow integration).

• Emerging Moat & Strategic Bundling:

  • Potential to grow competitive advantage as batteries, sonar, and mapping systems are bundled together and/or cross-sold.
  • “Not a wide moat today… but there is a path to building a competitive advantage over the next decade through three ways: lead in battery technology, bundling products, and developing/acquiring new tech.” — Brett [39:43]

6. Growth Prospects and Market Dynamics

41:12 – 46:59

• Contract Pipeline:

  • Large, growing total addressable market as UUV spending accelerates globally.
  • New battery facilities to triple capacity by year-end, prepping for surge in orders.

• Revenue Potential:

  • “Kraken believes it has a pipeline of potential contracts worth $2 billion… with revenue under $100 million over the last 12 months, that's a giant opportunity.” — Brett [44:10]
  • If militaries purchase UUVs at scale ($2M per UUV, 100 units/year): huge expansion opportunity.

• Recent Performance:

  • Revenue up from $63.5M in 2024 to $87M in 2025 forecast.
  • Batteries driving growth as SAS levels off and 3D at Depth scales up.

7. Management & Execution

47:14 – 55:14

• Leadership Transition:
  • Founder Carl Kenny (ocean tech background) led until health issues in late 2022; passed in 2025.
  • CFO Greg Reed took over as CEO; has overseen massive growth ($81M market cap to $1B+).
• Governance:
  • Frugal, hands-on management (“flies coach”), strong history of smart acquisitions (e.g., 3D at Depth for ~1x revenue with 60% gross margins).
  • Board strengthened by adding ex-Navy high command (Vice Admiral Michael J. Connor), boosting defense credibility.
  • “From my seat it looks like Reed has successfully navigated Kraken Robotics from a micro cap to a hyper growth small cap company…” — Brett [47:33]
• Caveats:
  • Less experienced with scaling a large public company; possibility of future leadership changes.

8. Financial Modeling and Valuation Takeaways

55:14 – 60:47

• Projections:

  • Base case: 15% annual growth for 3D at Depth, 25% for batteries, 10% for SAS, yielding $205M USD revenue in 2030.
  • Margin expectations: Targeting 20% operating margins (driven by scale and mix).
  • Valuation: At current market cap, would be trading at 21x 2030 EBIT—suggesting current valuation is elevated, but potentially conservative if right-tail growth events play out.
  • Possible “right tail” scenario: Acquisition by major client Anduril, or ongoing hypergrowth.

• Notable Quote:

  • “There is a chance this becomes and stays a hypergrowth company… That could stick around for the next five years as well. There’s a possibility.” — Brett [60:40]

9. Buy, Sell, or Hold?

61:31 – End

• Brett’s Stance:
  • Keeping on watch list due to high valuation after rapid recent run-up, but very interested for future pullbacks.
  • “Part of me… saying this is a David Gardner rule breaker. It’s going up, so that means you should buy it. But the other side… is saying that’s not how I like to invest.” [61:31]
  • Would revisit if valuation cools (targeting 10x 2030 EBIT range).
  • Acknowledges micro caps like this are subject to deep drawdowns, could present opportunities later.

Notable Quotes & Memorable Moments

• “The moat in defense doesn’t come from technology… but the [locked-in] contracts with defense programs.” — Brett [30:29]
• “Think of it like improved pixel rating for underwater mapping.” — Brett [15:56]
• “Kraken is able to sell... at half the cost of competitors like Northrop Grummen while still maintaining 50% gross margins.” — Brett [25:43]
• “Once you’ve got that plugin, there’s like decades worth of trust that have been built up.” — Ryan [32:45]
• “There’s a chance this becomes and stays a hypergrowth company… That could stick around for the next five years as well. There’s a possibility.” — Brett [60:40]
• “This is such a niche place… Probably every listener, if we’re being honest.” — Ryan [33:18], on Anduril and defense tech.

Timestamps for Key Segments

• [00:32] - Introduction to the subsea arms race and defense spending cycle
• [01:58] - Kraken Robotics introduction and context of undersea defense
• [06:55] - The engineering and physical challenges of deep-sea operations
• [10:47] - Kraken’s three product categories (batteries, sonar, 3D mapping)
• [22:18] - Financial overview and estimated product splits
• [24:33] - Deep dive into competitive advantages
• [30:29] - Discussion on defense sector moats
• [39:33] - Acquisition strategy and emerging moat potential
• [41:12] - Kraken’s growth prospects and contract pipeline
• [47:26] - Management, leadership, and board analysis
• [55:29] - Revenue and margin projections for 2030
• [61:31] - Closing thoughts: Will Brett buy Kraken now?
• [63:55] - Discussion on micro-cap volatility and investment opportunities

Conclusion

This episode offers both a rare peek into the technical realities of subsea defense and a clear-eyed investment analysis of an overlooked small-cap stock riding a major secular trend. Kraken Robotics stands as a prime example of how niche engineering talent, smart capital allocation, and timely execution in the defense contracting world can lead to rapid, multi-bagger returns. While the current valuation feels rich to the hosts, Kraken's dominant technology in a fast-growing market, emerging competitive advantages, and strong alignment with major defense disruptors like Anduril signal substantial long-term opportunity—if investors can stomach the volatility and wait for a better entry point.

For more detail, check out the episode’s accompanying newsletter via the show notes.

Hosts' disclaimer:
"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."