Keysight Technologies: A Beacon in AI and Defense Innovation, Poised for Dominance

Keysight Technologies (KEYS) has emerged as a pivotal player in the rapidly evolving tech landscape, leveraging its expertise in advanced testing and measurement solutions to capitalize on two of the most transformative sectors: artificial intelligence (AI) infrastructure and defense modernization. The company’s Q2 2025 results, which exceeded expectations with 7% year-over-year revenue growth to $1.31 billion, underscore its strategic mastery in these high-growth markets. Let’s dissect why now is a critical moment for investors to consider this underappreciated gem.

Financial Fortitude: A Foundation for Ambition

Keysight’s Q2 performance was nothing short of exceptional. Its non-GAAP net income surged to $295 million ($1.70 per share), a 21% increase from the prior-year period, while free cash flow soared to $457 million. This liquidity buffer positions the company to fuel R&D investments, pursue strategic acquisitions, and reward shareholders via buybacks—$150 million worth in Q2 alone.

The company’s segmental strength is equally compelling. The Communications Solutions Group (CSG), which dominates AI-driven data center demand, grew 9% to $913 million, while the Defense & Government segment within CSG expanded 9% year-over-year. Meanwhile, the Electronic Industrial Solutions Group (EISG), though softer in automotive, still grew 5% to $393 million. These figures reflect a well-balanced portfolio with growth drivers across geographies and industries.

AI: The $1.3 Trillion Opportunity Keysight Is Winning

The AI revolution is not just about algorithms—it requires physical infrastructure to support compute, memory, and networking at scale. Here, Keysight’s role is indispensable.

• Leading the 400G+ Network Race: Keysight has pioneered the first 408G optical transmission solution, enabling 1.6- and 3.2-terabit networks. This technology is critical for hyperscalers and cloud providers racing to deploy next-gen AI workloads.
• Silicon Photonics & Co-Packaged Optics: With foundries like TSMC and Intel ramping up advanced nodes, Keysight’s silicon photonics test solutions are in high demand. These tools ensure chips can handle the heat, power, and latency demands of AI.
• Software as a Growth Lever: Keysight’s digital twin and system emulation platforms are being adopted by satellite and 6G developers, enabling real-world testing of AI-driven systems without physical prototypes.

CEO Satish Dhanashekaran’s “multiyear roadmap” for AI is no empty promise. The company’s $2.4 billion backlog entering Q3 includes significant AI-related orders, and its partnership with Spirent (pending regulatory approval) will further cement its position in network testing.

Defense: A Geopolitical Tailwind with Minimal Risk

While AI is a growth engine, Keysight’s defense segment is a recession-proof anchor. Governments worldwide are accelerating spending on modernization amid rising geopolitical tensions.

• Europe’s Modernization Surge: Keysight secured a major European defense contract to upgrade radar and antenna testing capabilities. This reflects a broader trend: NATO allies are investing $100+ billion annually in defense tech.
• U.S. Prime Contractor Backlogs: Despite budget uncertainties, U.S. defense primes like Raytheon and Lockheed Martin operate at record backlogs, ensuring steady demand for Keysight’s phase noise analyzers and 224G transceiver testers.
• Supply Chain Resilience: With minimal China exposure and Southeast Asia-based manufacturing, Keysight avoids the disruptions plaguing peers.

Navigating Risks: Tariffs and Trade-offs

No investment is without risk. Keysight faces $75–$100 million in annual tariff costs due to U.S. trade policies. However, management has a clear plan: supply chain diversification, pricing adjustments, and operational efficiencies will fully offset these costs by 2026.

The Investment Case: A Rare Confluence of Momentum and Value

• Valuation: At 20x forward P/E, KEYS trades at a discount to peers like Analog Devices (ADI) and Keysight’s own long-term growth trajectory (5–7% revenue growth).
• Catalysts Ahead: Spirent’s integration, tariff mitigation completion, and AI/defense pipeline execution will drive multiple expansion.
• Dividend Growth: With a 3.2% yield and a track record of increasing payouts, KEYS offers both growth and stability.

Final Call: Act Now Before the Rally Begins

Keysight is not just a beneficiary of AI and defense trends—it is an enabler of them. Its Q2 results prove it can execute in a choppy macro environment, while its $3.12 billion cash hoard and disciplined capital allocation give it room to thrive.

Investors seeking exposure to the next phase of tech innovation—where hardware meets AI and geopolitics fuels spending—should act decisively. KEYS is a buy at current levels, with a 12–18 month price target of $160–$180, reflecting its dual growth engines and underappreciated value.

The AI and defense megatrends are here to stay. Keysight Technologies is positioned to lead—and investors who move now will reap the rewards.