Release the Kraken!

Navigating the Depths of Robotic Innovation

Feb 16, 2025

The most amazing thing about the deep sea is that we still know so little about it. We've only explored about 5% of Earth's oceans.

Today, a different kind of Kraken is emerging from the deep, not as a mythical monster, but as a revolutionary force in underwater technology. Kraken Robotics (TSXV: PNG) has grown from a small Canadian startup into a global leader in underwater sensing and robotics, and its trajectory suggests this could be just the beginning of a remarkable growth story.

A Vision Born in the Deep: The Kraken Robotics Story

Karl Kenny, a former Canadian Navy officer and serial entrepreneur, spun Kraken out of Marport Deep Sea Technologies in 2012 with eight employees. His vision: democratize synthetic aperture sonar (SAS) — then a niche, costly military tool — for commercial use. Under Kenny’s leadership (CEO until 2022), Kraken expanded into robotics, batteries, and services, landing NATO contracts and offshore energy partnerships. Kenny’s sudden passing this week marked the end of an era, but his legacy remains. Kraken Robotics has transformed into a robust business that is capturing massive opportunities in both defense and commercial markets.

Karl grew up in a small fishing village in Newfoundland with a deep connection to the sea. Over his 45-year career in the marine technology industry, he led the development of a wide range of advanced marine technologies and products in Canada, the United States, and Europe.

What started as a focused effort to commercialize compact SAS technology for unmanned underwater systems has evolved into something much bigger. Today, Kraken Robotics is a global enterprise with offices across Canada, the United States, Brazil, Germany, Denmark, and Scotland, employing over 260 people and generating substantial revenue growth year after year.

As geopolitical tensions rise and the world increasingly turns to offshore wind energy, Kraken's advanced underwater imaging and robotics solutions have become critical tools for both defense and commercial applications.

Current CEO Greg Reid, a financial strategist, has steered Kraken toward scalable growth, emphasizing recurring revenue streams (e.g., Robotics-as-a-Service) and vertical integration.

Breaking Through the Surface: Kraken's Revolutionary Product Suite

The company offers subsea imaging sensors, underwater batteries and robotic systems. What makes Kraken Robotics stand out in the underwater technology space is its comprehensive suite of products that outperform competitors in resolution, efficiency, and operational flexibility.

Synthetic Aperture Sonar (SAS)
- AquaPix MINSAS: Delivers 3 cm resolution at 200 meters — 10-30x clearer than competitors like Kongsberg
- KATFISH: A towed SAS system surveying 4 km²/hour at 10 knots — 10x faster than traditional methods. Critical for NATO mine countermeasures (MCM). Kraken’s SAS is embedded in the US Navy’s $10B MCM modernization program and deployed by navies in Poland, Australia, and Denmark.
Subsea Robotic Systems
- SeaPower Batteries: Pressure-tolerant lithium cells doubling AUV endurance (24–48 hours) compared to rivals
- Remote Mine Disposal Systems (RMDS): Safely neutralize underwater explosives for NATO clients like Canada and Denmark.
Robotics-as-a-Service (RaaS)
- Sub-Bottom Imager: Penetrates seabeds up to 50 meters for offshore wind farm hazard detection.
- Acoustic Corer: Non-invasive seabed sampling for oil/gas pipelines.

Synthetic Aperture Sonar: Seeing the Unseeable

At the heart of Kraken's technology portfolio is their AquaPix MINSAS (Miniature Interferometric Synthetic Aperture Sonar) system. This is not just another sonar system - it represents a quantum leap in underwater imaging capability. While traditional sonar systems struggle to achieve 5-10 cm resolution, AquaPix delivers an unprecedented 3 cm resolution at ranges up to 200 meters. This level of clarity isn't just impressive on paper - it's transformative for real-world applications. The image bellow, taken from the company's investor presentation, illustrates the difference in resolution.

Consider mine detection, for instance. The US Navy's strict 5 cm resolution standard for mine classification seemed ambitious just a few years ago. Kraken's 3 cm resolution doesn't just meet this standard, it exceeds it significantly. This superiority has led to multiple contracts with NATO navies.

What is equally impressive is the pricing strategy. While competitors like Kongsberg and Thales bundle their SAS systems with expensive unmanned underwater vehicles (UUVs) at price points exceeding C$1M, Kraken offers standalone systems starting at C$300K. This approach has democratized access to high-end sonar technology, opening up new markets and applications.

On September 23, 2024, Kraken announced a C$3M SAS orders:

Kraken Robotics is pleased to announce that it has received several orders totaling approximately $3 million for Miniature Synthetic Aperture Sonar (MINSAS) systems from three separate customers.
Kraken’s MINSAS offers industry-leading resolutions of up to 2 cm x 2 cm (post-processed) at 200 meters per side in a compact, light-weight form factor. It is designed to be easily integrated on a variety of platforms including UUVs, remotely operated vehicles, and Kraken’s KATFISH towed SAS. Kraken has been selling MINSAS systems since 2015 to defense and commercial customers in more than 15 countries worldwide.

Keep in mind that SAS is not easy. Only three companies in the world - Northrop Gruman, Thales, and Kongsberg - offer SAS and Kraken's is the best one - producing high-resolution images, operating in the deep ocean, and covering a large area with each pass.

Kraken sells its SAS systems for anywhere between $200-800K.

KATFISH: Speed Meets Precision

The KATFISH towed SAS system exemplifies Kraken's ability to combine multiple innovations into a game-changing product. A SAS system has to be towed at a constant speed and in a straight line to produce those high-resolution images, because, as all sonar tech (sonar stands for sound/sonic navigation and ranging), it is based on sound beams bouncing off of objects. It is actually what bats and dolphins use to navigate their environment. The system also has to be kept on a steady course to provide the most accurate images.

KATFISH, operating at speeds up to 10 knots, can survey 4 square kilometers per hour — 10x faster than traditional methods. This isn't just about speed, it's about economics. Faster surveys mean less vessel time, which can cut project costs by up to 50%.

But perhaps the most revolutionary aspect of KATFISH is its real-time data processing capability. While competitors' systems often require days of post-mission analysis, KATFISH streams processed SAS data live, enabling immediate target detection and classification. This capability is particularly crucial for time-sensitive military operations and emergency response scenarios.

Kraken sells those KATFISHes for $2-5M. This is the key driver of the company's revenues and profits, at least in the near term.

SeaPower: The Power to Stay Down Longer

One of the biggest limitations in underwater operations has always been power supply. Kraken's SeaPower batteries have effectively doubled the endurance of autonomous underwater vehicles through innovative pressure-tolerant battery technology.

These are lithium-ion batteries, but what is unique about them is Kraken's pressure-tolerant gel encapsulation technology, which allows the batteries to operate in harsh conditions up to 6,000 meters underwater. The investor presentation mentions that replacing the original batteries on one such underwater vessel with Kraken's batteries resulted in 50% increase in the amount of time it could stay under water.

This breakthrough has significant implications for both military and commercial applications. Longer mission times mean more efficient surveys, reduced operational costs, and the ability to explore previously inaccessible areas. This technology has been so successful that it's been adopted by multiple navies and energy firms, creating a growing recurring revenue stream.

The SeaPower battery packs go for anywhere between $1-10M, depending on the size of the vessel (and they tend to get bigger).

Robotics-as-a-Service: The Future of Underwater Operations

Kraken's newest business segment, Robotics-as-a-Service (RaaS), represents the company's evolution from a pure technology provider to a full-service solutions provider. Through the strategic acquisition of PanGeo Subsea in 2021, Kraken now offers end-to-end survey services, including geophysical inspections, sub-bottom profiling, and acoustic coring.

Kraken provides turnkey solutions for underwater surveys, including:

Geophysical data collection (e.g., sub-bottom profiling)
Acoustic coring for seabed composition analysis
Data processing and AI-driven analytics for actionable insights.

This service-based model generates approximately 30% of revenue with impressive 60%+ gross margins. More importantly, it provides stable, recurring revenue streams and deeper customer relationships. The RaaS division has been particularly successful in the offshore wind sector, supporting projects in Europe, Taiwan, and North America, with a pipeline exceeding 3GW by 2025.

Key Markets

Defense: Contracts with NATO navies for mine detection and disposal systems.
- Naval Mine Countermeasures: Kraken’s AquaPix SAS systems detect and classify naval mines with 3 cm resolution, used by NATO navies like Denmark and Poland for mine-hunting operations.
- Remote Mine Disposal: RMDS (Remote Mine Disposal Systems) enable safe neutralization of underwater explosives, deployed by the Royal Canadian Navy and others.
- Maritime Surveillance: High-resolution sonar supports harbor protection and submarine detection missions.
Commercial: Offshore wind farm surveys, pipeline inspections, and seabed mapping to identify hazards.
- Offshore Wind Farm Surveys: Mapping seabeds to identify hazards like boulders or UXOs (unexploded ordnance) for turbine placement, serving clients in Europe and North America.
- Oil/Gas Pipeline Inspections: Subsea robots equipped with SAS and laser imaging assess pipeline integrity and detect corrosion.
- Telecommunications Cable Route Surveys: Pre-lay surveys to avoid geological risks and post-lay inspections for damage.
Scientific Research: High-resolution 3D imaging for ocean exploration and environmental monitoring.
- Environmental Monitoring: Tracking seabed changes, habitat mapping, and pollution detection using 3D imaging.
- Underwater Archaeology: High-resolution SAS systems locate shipwrecks and submerged cultural artifacts.
- Oceanographic Research: Supporting deep-sea exploration with pressure-tolerant batteries for extended AUV missions.

Kraken's Edge

Kraken has a multi-pronged strategy (sorry, had to make this pun) that gives it a competitive edge.

Sharper: Industry-leading resolution far surpassing traditional sonar systems
Cheaper: Some 25-50% cost advantage compared to the big boys - Thales, Teledyne, and Kongsberg
Faster: KATFISH Towed System surveys 10x faster than conventional methods
Smarter: Processes real-time SAS data during missions, slashing post-processing time from days to hours
Longer: SeaPower Batteries: Provide more than 2x better battery life compared to traditional pressure-housed batteries
Modul-er: Unlike Kongsberg or Northrop Grumman, Kraken sells SAS independently, allowing integration with third-party UUVs

The Numbers Tell a Growth Story

Kraken's financial performance over the past decade has been nothing short of remarkable. The company has achieved a 10Y CAGR of approximately 60%, with recent years showing even stronger momentum: LTM +80%, FY23 +70%, FY22 +60%, and FY21 +110%.

This growth isn't just about top-line expansion. Gross margins have averaged 45%, while operating and net margins have shown steady improvement as the company scales. The RaaS segment's 60%+ gross margins are particularly encouraging, suggesting potential for overall margin expansion as this business grows.

The company's capital structure reflects disciplined management. While the share count has tripled over the past decade, this dilution has primarily come from strategic capital raises rather than excessive stock-based compensation. In fact, stock-based compensation has remained below 2% annually for the past three years, well within the healthy range for growth technology companies.

Recent capital raises have been substantial but purposeful. The company has raised approximately C$150M through offerings, including a C$51.75M public offering and a C$25M bought deal in October 2024. These funds are being deployed to expand manufacturing capacity, fund R&D, and support working capital needs for large contracts.

Market Opportunity and Growth Drivers

Kraken's growth potential is supported by powerful secular trends in both its primary markets.

Defense Sector

The conflict in Ukraine has shown that the use of drones is becoming ubiquitous and is changing the way war is waged. It can be said that drones equalize, in a way, the forces of smaller countries with those of large ones. Ukraine has been able to considerably disrupt Russia's oil refining infrastructure using cheap drones.

Underwater drones offer such potential as well. They can neutralize navy vessels that cost hundreds of millions. And also, they are of great help in disposing of mines. It is only logical that underwater drones are gaining prominence now. Kraken offers key components that make these drones more efficient and harder to detect.

The global naval landscape is undergoing a paradigm shift driven by the proliferation of extra-large autonomous underwater vehicles. These systems, which combine stealth, cost-effectiveness, and mission flexibility, are reshaping maritime deterrence strategies and commercial subsea operations. For Kraken Robotics, this transformation presents an amazing opportunity.

The Russia-Ukraine conflict has validated the disruptive potential of maritime drones. Ukraine’s Magura V5 and Sea Baby drones, costing $240,000–$250,000 per unit, have neutralized Russian vessels valued at $50–$500 million. This 1:200+ cost-damage ratio underscores why NATO states are accelerating investments in XL-UUVs.

The defense sector represents Kraken's largest opportunity. NATO's increased focus on underwater security amid rising geopolitical tensions has created strong demand for mine countermeasure systems and underwater surveillance capabilities. The US Navy's $10B mine countermeasures modernization program alone represents a massive opportunity. Kraken's superior technology and competitive pricing have already secured contracts with multiple NATO navies.

Kraken has secured contracts with the Danish, Polish, and Canadian navies, delivering SAS systems, RMDS solutions, and autonomous launch-and-recovery systems (ALARS). For example, the Royal Danish Navy completed sea acceptance trials for Kraken’s KATFISH sonar and ALARS in 2024, validating the technology’s operational readiness.

The company’s $900 million sales pipeline (as of December 2023) reflects bidding activity across 10+ NATO countries, with sonar upgrades and UUV integrations representing core opportunities.

A pivotal growth driver is Kraken’s collaboration with Anduril Industries, the defense technology disruptor. Anduril’s Dive-LD AUVs integrate Kraken’s SeaPower batteries and sensors, with each Dive-LD requiring approximately $2.5 million in Kraken components (batteries representing over 90% of the value).

Offshore Energy

The rapid growth of offshore wind energy provides another significant growth vector. Kraken's seabed mapping services are crucial for wind farm development, from initial surveys to ongoing maintenance. The company's current pipeline includes projects exceeding 3GW by 2025, and global offshore wind capacity is expected to double by 2030. The European offshore wind market today is at 34 GW and represents 45% of the total global offshore wind capacity. The EU is planning to grow this 10 times by 2050.

The US offshore wind market is practically non-existent - 174 MW as of May 2024. However, several projects are under construction, including the 806 MW Vineyard Wind 1 project and the 2,587 MW Coastal Virginia Offshore Wind project. The Biden administration had set a national goal of deploying 30 GW of offshore wind by 2030, but these plans have been halted now.

Kraken’s commercial pipeline includes recurring contracts with offshore operators like Ørsted and Equinor, though specific deal values are undisclosed.

Additionally, the oil and gas sector also requires high-resolution sonar and AUVs for pipeline inspections and subsea structure maintenance, providing another stable revenue stream. Here is an image illustrating the use of their 3D laser inspection tool to detect corrosion on a mooring chain.

Whether you are an offshore oil-and-gas or wind operator, you want to know how your infrastructure is changing over time.

Kraken’s dual-market strategy creates operational synergies. For instance, SeaPower batteries developed for naval UUVs are now marketed to offshore survey companies seeking extended AUV endurance. Similarly, KATFISH sonar systems, initially designed for mine detection, are repurposed for wind farm seabed surveys. This technology transfer reduces R&D costs and accelerates product commercialization.

Financials

Let's look at some numbers.

Growth over the 2016-2024 period has been spiky, but the 10-year CAGR is close to 60%. I also looked at shorter, 3Y, periods and the CAGR varied between 9% and 141%, with a mid range of 40-60%.

Gross margin has averaged 45% over the period while operating and net margins have been gradually improving, indicating that the company is scaling up and improving its operations.

The last 6 quarters make a strong claim that Kraken is now consistently profitable and will stay that way. The last reported quarter, Q3 2024, breaks the trend a bit, but the weaker result was mainly due to C$343K foreign exchange loss and C$345 increase in financing costs (signed a new credit facility). The actual revenue decline was 4% due to lower revenues from KATFISH and RMDS. Such fluctuations, and much larger ones, are in the nature of Kraken's business due to the timing of orders and the size of contracts.

Quickly growing companies warrant a look at the rate of share issuance. Kraken Robotics' share count has almost tripled in the last 10 years. The good thing is that this growth primarily stems from strategic capital raises, driven by the company’s aggressive expansion in underwater robotics and defense markets, and not so much from stock-based compensation. The latter peaked in 2020 at 9% and has settled at a sub 2% level in the past 3 years.

There was a study by TDM Growth Partners titled Stock-Based Compensation in Public Growth Companies about a year ago, which established that:

...growth technology companies should target an average annual SBC -based net dilution of less than 3% p.a.
Of the 17 companies that had an average annual SBC-based net dilution of greater than 3% zero outperformed the NASDAQ.

SBC over the period was only C$4.5M and averaged C$500K per year.

Another important point to note is that the overhang of warrants, which were issued when the company went public, has been removed. However, option grants have replaced it now. As of Q3 2024, there were 11.2M options outstanding with an average price of $0.81 and an average maturity of 4 years. The latest big issue of 6M options expires on August 2031 and has a weighted average exercise price of C$1.46.

CEO, Reid Michael, owns 8.2M shares (3.11%). He has been growing his stake via both option exercises and open-market purchases. Former CEO, Karl Kenny, at one point owned over 20% of the company. However, he liquidated all or most of his stake in the open market in the period 2022-2024. No explanation was given, so this is a bit perplexing.

Similarly, major shareholder and client, Ocean Infinity, exited its position in late 2023. This was explained as:

the end of Ocean Infinity’s five-year investment relationship with Kraken, which began with a C$2.3 million private placement in June 2018 at C$0.20 per share. The exit aligned with Ocean Infinity’s strategic shift toward surface robotics and away from minority equity holdings in maritime technology firms.

Overall, I prefer to see significant insider ownership and open-market purchases. The current CEO sets a good example.

Q3 2024

Consolidated revenue for Q3 2024 declined 4% to $19.5 million compared to $20.3 million for the quarter ending September 30, 2023. The year-over-year decline occurred as a significant increase in SeaPower subsea batteries and Services revenue (Sub-Bottom Imager and Acoustic Corer) did not offset lower KATFISH and Remote Mine Disposal System (RMDS) revenue.
Product revenue in the quarter declined 27% to $12.5 million compared to $17.1 million in the prior year, while Services revenue in the quarter increased 121% to $7.1 million compared to $3.2 million in the prior year.

Fiscal 2024 is on track to be another record year for Kraken, driven by strength across defense and offshore energy end markets where there is increased focus on surveillance and security of critical underwater infrastructure. While the demand environment for our technology solutions across defense and offshore energy has never been better, we have also made operational improvements positioning us to better execute on these opportunities as they land. Having completed a $52 million equity financing in October, we have significantly strengthened our balance sheet this year with more than $115 million of new equity and committed credit facilities. This increases our ability to ramp production, continue to push our innovation agenda forward on new product design and new service offerings, and act on select niche accretive acquisition opportunities,” said Kraken President and CEO Greg Reid.

Kraken is on track to achieve, and probably beat, its 2024 guidance.

Valuation

Kraken's share price has exploded in the last couple of months.

Currently, Kraken trades at C$2.56 per share (C$680M market cap). Sales and earnings for the last 12 months were C$91.2M and C$9M, respectively, giving the company rather steep multiples of 7.5 times sales and 75 times earnings. In such rarefied air, a lot has to go right to just hang on to this valuation. We also have to balance this with the facts that:

high-growth companies can rarely be had at reasonable multiples (but Kraken was trading under C$1 (30 P/E) as recently as July 2024)
the valuation of these companies is heavily skewed towards future earnings (which don't much resemble past earnings)

Kraken grew sales from C$2.4M to C$91.2M over the past 9 years, i.e. 50% CAGR. At this rate, sales are doubling every 16 months. However, this growth has been quite choppy. This is one of the major risks the company faces. A large part of their sales are based on large, non-recurring contracts. They are doing their best to smooth this over a bit by growing the subscription (RaaS) business, but it is still in the very early stages. The PanGeo acquisition broadens the commercial market reach and provides a platform to grow recurring revenue.

Moreover, Kraken has significant customer concentration. If anything goes wrong and they lose a customer or just see reduced orders from a single customer, it may have a disproportionate effect on the stock price and potentially the viability of the company.

With all these caveats as well as being fully conscious that any valuation for such a company is more than likely to be wrong, I am putting forward a number along with the assumptions and worksheet behind it.

40% growth rate over the next 5 years, subsiding to a risk-free rate of 4% by year 10
14% target per-tax operating margin

I am attaching Professor Damodaran's valuation spreadsheet that I have used. Feel free to play around with the numbers.

Kraken 202502

250KB ∙ XLSX file

Download

I got a value of C$1B (rounding), which is some 40% higher than the current price. The verdict is "undervalued," despite the ludicrous multiples. I wouldn't read too much into this number. Treat it as a crude estimate and play out the various scenarios in the spreadsheet.

As it is always the case in investing, everything is in the assumptions, and more precisely in the delta of your and the market's assumptions.

Having studied it over the past week, Kraken appears to be a fascinating company benefiting from two major tailwinds - quickly intensifying interest in what are essentially underwater drones and the ongoing expansion of offshore energy.

I wish a knew about it in mid 2024, when it was trading at $1. For now, I am opening a tracking position. I will keep an eye on the company over the next couple of quarters and I may make it a full position if I build conviction in its bright future or the price retracts to a more comfortable level.

There have been some rumors, albeit for a while now, that Anduril, which is one of the main customers of their batteries, or another defense company might acquire them. Either it doesn't happen, and the price takes a tumble or it does, and I don't have to think about Kraken anymore.

Risks to Consider

While the investment case is compelling, several risks warrant careful consideration:

Customer Concentration: With approximately 70-80% of revenue coming from defense clients, Kraken is vulnerable to defense budget cuts or contract delays.
Valuation Sensitivity: The premium valuation leaves little room for execution missteps. Any growth slowdown could trigger significant multiple compression.
Competition: Larger rivals with deeper pockets could eventually match Kraken's technology advantages or undercut pricing in commercial markets.

Conclusion: A Deep-Sea Opportunity

Kraken Robotics represents a unique opportunity to invest in a company at the forefront of underwater technology innovation. The company's superior technology, strategic market position, and impressive growth trajectory make it an attractive candidate for investors seeking exposure to defense modernization and offshore energy expansion.

While the premium valuation demands careful consideration, Kraken's track record of execution, substantial growth pipeline, and expanding market opportunities provide confidence in its ability to grow into and potentially exceed its current valuation.