Kraken Robotics: "Value Investing" in a Terminal Value Company

I understand this isn't a traditional value investing type of opportunity but it is "value" investing in the sense of a company that can deliver the price you pay in its terminal value (and probably a fair bit of cash flows along he way) due to structurally favorable conditions. For context, I shifted money from H&R Block into Kraken today which could not be a more different company. **Kraken Robotics is a unique, structurally profitable subsea defense platform, further augmented by the Covelya acquisition.** **$KRKNF (US - OTC)** **$PNG (TSX)** I’ve held this stock since about \~$1.50 and sold it earlier this year. However, with the recent sell off I find it to be very compelling again. The prior Kraken thesis was that the company owned key components for an emerging wave of underwater autonomy. With the Covelya acquisition (closed in July 2026), Kraken is becoming a diversified, profitable, subsea technology platform with power, sensing, navigation, and communications. **First, the old Kraken already had a valuable but narrow position:** synthetic aperture sonar, SeaPower subsea batteries, KATFISH, and other survey services. **Second, Covelya changes the company’s product offering:** Kraken announced a C$615 million acquisition, with C$480 million cash and C$135 million in stock, and disclosed that the combined company had roughly C$365 million of 2025 revenue and a 24% combined adjusted EBITDA margin. **Third, the market may not realize the attractiveness of the combined entity:** the combined company can sell more complete underwater systems to the same customers and "bundle" products  Let's take each point one at a time. **The Old Kraken** The old Kraken was a highly attractive but narrower moat business. It was essentially a proxy to Anduril. The quality of the company was apparent from the technical niche. Underwater autonomy is a difficult environment and systems need power and sensing with no GPS. Kraken’s core products sat directly in the bottleneck.  The clearest example is SeaPower. Kraken’s subsea batteries deliver energy density in a pressure neutral subsea design. Traditional deepwater battery systems often require pressure housings, which add significant weight and volume. Kraken’s battery is roughly 46% lighter per kWh than traditional pressure housed subsea alternatives, giving customers more energy density at greater depths. This likely remains the strongest moat in Kraken’s business, hence why the gross margin is around 60% for a hardware supplier. Kraken has a potentially large position in Anduril’s Dive-LD and Ghost Shark programs. Each Dive-LD could contain several Kraken SeaPower batteries, Kraken sensors, and Kraken software, with roughly C$2.5 million of batteries and C$0.5 million of sensors/software per vehicle. It also highlighted Anduril’s Rhode Island facility, which was expected to support production of up to 200 Dive-LD AUVs per year.  That is largely what the market has now recognized. The stock has increased several fold and the old argument is much less compelling today. It is a very good business, but at today’s valuation it is not obviously mispriced if the company remains primarily a component supplier with customer concentration. The question now is whether Kraken can evolve from a niche component vendor into a broader subsea defense platform.  **Covelya Acquisition and Next Leg of Growth** The Covelya acquisition is the event that changes the valuation mechanics. Kraken announced the acquisition of Covelya Group for C$615 million, consisting of C$480 million of cash and C$135 million of stock. On a combined basis, Kraken disclosed approximately C$365 million of 2025 revenue and a 24% combined adjusted EBITDA margin.  This is a significant acquisition that takes Kraken from a promising subsea supplier into a much larger, profitable, technology platform. ***They essentially bought a larger business for a lower multiple than their current business with their own “overpriced” stock***. Covelya brings a collection of highly relevant underwater technology businesses, including Sonardyne, EIVA, Forcys, Wavefront, Voyis, and Chelsea Technologies. These assets fill in the rest of the subsea stack: navigation, positioning, communications, monitoring, imaging, sensing, and software. Kraken already had power through SeaPower batteries and imaging/sensing through synthetic aperture sonar and related products. Kraken can now sell a more complete architecture into autonomous underwater vehicles, mine countermeasure systems, seabed surveillance, offshore fiber optic cable monitoring, etc. Customers in this market do not want dozens of vendor relationships for critical underwater systems. Navies, defense primes, and commercial operators need systems that work together in hostile environments where failure is expensive. A vendor that can provide a complete stack has a different strategic position than a vendor selling a single component. Before Covelya, Kraken was a scarce supplier and post-Covelya, Kraken has the scale and product reach to become a durable consolidator in subsea defense and commercial maritime technology.  **Valuation and Combined Earnings Power** Valuation is the third leg. Kraken does not look cheap on the old Anduril way of thinking. If Kraken remained primarily a component supplier with customer concentration and lumpy defense programs, much of the upside would already be reflected in the price and I would not be a buyer here. The deal also creates dilution. Kraken is paying C$135 million of the purchase price in stock and raised equity to help fund the cash portion of the acquisition. The question now is whether Kraken is issuing equity to buy earnings power at an attractive return. If the combined business can grow revenue into a C$500–600 million base over the next couple years (just taking analyst estimates based on growing pipeline) while sustaining 24–26% EBITDA margins, Kraken could generate roughly C$120–155 million of EBITDA. As capex intensity falls after the current investment cycle (capex should fall this year given the new battery facility in Nova Scotia is online), more of that EBITDA should convert into earnings and free cash flow. This isn’t a generational 30x Sandisk in one year type of opportunity. However, this could be a slow and steady compounder over many years. They make a niche set of products for an industry with growing importance. I see this as a baby Heico or Transdigm or Teledyne type of company but at like 1/40 of the scale. Develop niche products, roll up attractive complementary companies, service products over time, and trust the management to make the right play. Risks: * Integration risks with Covelya * Defense programs and Navies choose domestic suppliers over a complete offering from Kraken + Covelya * Lumpy contracts * Low liquidity from KRKNF for US buyers and TSX (need to wait for main Toronto Stock Exchange uplisting or hopefully Nasdaq/NYSE)