Hook / Thesis
Telos is not a pure narrative stock anymore. The company reported sequential acceleration in revenue through FY2025 and, crucially, materially positive operating cash flow in each of the last three quarters: $6.11m (Q1), $6.95m (Q2), and $9.15m (Q3). That cash performance — even while GAAP remains marginally negative on a quarterly basis — is what separates a hopeful cybersecurity name from one that can plausibly move to sustainable profitability.
My trade idea: a tactical long in TLS with a clearly defined entry zone, a stop that respects its volatility, and staged upside targets tied to continued margin conversion and takeaway from new identity-enrollment initiatives. The setup is about cash-to-profit conversion driven by Security Solutions and Telos ID (including expanded TSA PreCheck enrollment offerings announced 09/29/2025), not a multiple expansion story alone.
What the business does and why the market should care
Telos provides software-based cybersecurity, cloud and identity solutions (Security Solutions segment) and enterprise security (Secure Networks segment). The company highlights Security Solutions as the revenue driver. Investors care because identity, cloud security, and enrollment/identity services are sticky, high-margin businesses when delivered at scale. For Telos, the path to durable profits is: increase higher-margin identity & subscription mix, control SG&A and R&D investment cadence, and convert the sizeable current-assets base into recurring revenue.
Why now? Management has demonstrated the business can generate operating cash even when GAAP results are still catching up. Operational cash was $9.15m in the quarter ended 09/30/2025 (filed 11/10/2025). That is the clearest indicator of improving cash conversion and gives the company tactical optionality - invest in growth and Telos ID expansion or accelerate deleveraging/returns to shareholders depending on execution.
Evidence from the recent results (numbers)
- Revenue, most recent quarter (Q3 FY2025 ending 09/30/2025, filed 11/10/2025): $51.444m.
- Gross profit, same quarter: $20.546m - implied gross margin ≈ 39.9% (20.546 / 51.444).
- Operating expenses: $23.014m, producing an operating loss of $2.468m for the quarter.
- Net loss attributable to parent: $2.114m; diluted EPS: -$0.03 on 72.58m diluted shares (basic/diluted average shares reported 72,580,000).
- Operating cash flow (quarter): $9.146m; net cash flow for the quarter: $2.053m.
- Balance sheet highlights (09/30/2025): assets $164.281m; current assets $102.832m; current liabilities $37.272m; equity $119.675m; intangible assets $31.246m.
Sequential context: revenues were $30.616m (Q1 FY2025, filed 05/09/2025), $35.968m (Q2 FY2025, filed 08/11/2025), then $51.444m (Q3). That is a meaningful quarter-to-quarter acceleration in top line and a gross margin near 40% in the latest period — supporting the idea that mix is heading in a healthier direction.
Valuation framing
There is no explicit market-cap field in the filings here, but we can estimate using the most recent trade snapshot: share price near $5.73 (snapshot as of 01/24/2026) and the diluted shares figure of ~72.58m reported in Q3 FY2025. That implies an approximate market capitalization of about $416m (72.58m * $5.73).
If you annualize the most recent quarter (51.444m x 4 = ≈$206m run-rate revenue), the market is valuing Telos at roughly 2.0x run-rate revenue. Given the improving cash generation and low net leverage on the balance sheet (total liabilities $44.606m vs equity $119.675m), the entry multiple is reasonable for a security software/identity company with visible cash flow improvement — provided Telos converts margin improvement into persistent operating income.
Keep in mind: GAAP profitability is not yet stable. The market is effectively paying for the story of margin leverage and recurring identity revenue growth. That means the stock's value is sensitive to execution on gross margin mix, SG&A control, and any one-time swings in revenue recognition.
Catalysts (what to watch)
- Execution on identity enrollment expansion - the company announced expanded TSA PreCheck enrollment locations on 09/29/2025. If Telos converts enrollment traffic into recurring ID-auth and subscription services, margins should improve.
- Further sequential revenue releases - management turning the Q3 step-up into a sustained growth run-rate will be the most direct catalyst for multiple expansion.
- Continued operating cash flow strength (quarterly OCF >$7-8m) which would give management optionality to invest, buy back shares, or accelerate path to GAAP profit.
- Large contract awards or enterprise deals that shift the mix toward software-as-a-service (SaaS)/identity recurring revenue.
Trade plan - actionable
Recommendation: Long TLS with a staged entry and explicit risk controls. This is a swing-to-position trade: if you like the name longer term, allocate in tranches.
Trade direction: Long
Time horizon: swing-to-position (weeks to months)
Risk level: Medium
Primary entry zone: $5.50 - $6.20 (near current price $5.73 as of 01/24/2026)
Alternate/add-on entry: on a dip toward $4.90 - $5.20 (buy-the-dip tranche)
Initial stop-loss: $4.60 (roughly 20% below primary entry midpoint; protects against a breakdown)
Target 1 (near-term): $7.50 (≈+30% from mid-entry)
Target 2 (medium): $9.50 (≈+65%)
Target 3 (stretch): $12.00 (position-level take-profit above +100%)
Position sizing: small-to-moderate early; add on confirmation of sustained OCF and positive operating income
Why these levels? The entry zone is close to current liquidity and recent trading. A stop at $4.60 respects recent support levels and limits capital at risk to a manageable single-digit tranche. Targets are staged to reflect (1) short-term re-rating if growth persists, (2) a move to visibly positive GAAP operating income or sustained OCF, (3) a full re-rating to a valuation consistent with faster-growing identity/security peers.
Risks and counterarguments
At least four risks to keep front of mind:
- Profitability risk: GAAP operating losses remain present in many quarters (Q3 operating loss $2.468m). If SG&A or R&D creep back up, improved gross margin alone may not produce GAAP profits.
- Revenue sustainability: the big jump to $51.444m could include lumpier contract timing or one-off items. If the company cannot sustain the higher sales cadence, the multiple will compress.
- Government / contract concentration: identity and enrollment services often depend on government or large enterprise contracts which can be lumpy or political. Contract timing risk can swing quarterly results materially.
- Competition and pricing: identity and cloud security are intensely competitive. Margin compression if Telos chases wins on price would hit operating leverage.
- Liquidity and volatility: stock has moved from the low single-digits into the $5-8 range within months. That introduces swing volatility — hence the need for precise stops.
Counterargument: A reasonable opposing view is that the market has already priced in Telos' operational improvement. The stock rallied substantially over the past year from sub-$3 levels into the mid-single digits and beyond; paying ~2x run-rate revenue for a company that still posts periodic GAAP losses may leave little margin for execution misses. Additionally, some prior quarters show large GAAP losses (e.g., Q3 FY2024 net loss of -$28.055m), indicating the company can swing widely. If growth disappoints or operating cash flow reverses, downside is quick.
What would change my mind
- I would materially increase conviction (and move from tactical to core buy) if Telos produces two consecutive quarters of positive operating income while maintaining or growing OCF (> $8m/quarter), and if recurring revenue / subscription mix is disclosed and growing as a percentage of total sales.
- I would reduce conviction or flip bearish if operating cash flow turns negative again, if sequential revenues revert to the sub-$35m range without a clear one-off explanation, or if SG&A ramps faster than revenue growth (eroding operating leverage).
Final take
Telos is a classic operations story with receipts to back it up: sequential revenue acceleration in FY2025 and improving operating cash flow that provides a real path toward profitability. That cash flow removes the “hope” label and replaces it with an executable lever management can pull — invest in Telos ID, win recurring identity contracts, or tighten the cost base to reach GAAP profits.
Trade idea: Long, staged entry around $5.50-$6.20, 20% stop at $4.60, and staged targets at $7.50 / $9.50 / $12.00. Size the position to that it’s meaningful but not portfolio-defining — execution matters. I’ll be watching revenue sustainability, recurring/ID mix, and consecutive quarters of positive operating income. If those check boxes appear, this becomes a longer-term position rather than a tactical swing.
Disclosure: This is a trade idea, not investment advice. Do your own diligence and size positions according to your risk tolerance.