Golden Dome Reliance And Launch Setbacks May Challenge Margins Yet Long-Term Prospects Remain Intact

Catalysts

About Firefly Aerospace

Firefly Aerospace develops and operates launch vehicles, spacecraft and defense software to support national security, lunar exploration and commercial space missions.

What are the underlying business or industry changes driving this perspective?

• Although the multibillion dollar Golden Dome initiative could expand demand for integrated launch, interceptor and fire control solutions, competitive awards and potential program restructuring may limit Firefly's share of this opportunity and cap long term revenue growth.
• Despite a growing need for resilient space infrastructure and responsive launch from allies in Europe and Asia, regulatory complexity, export controls and partner budget constraints could slow international site activations and delay the translation of these engagements into recurring launch revenue.
• While the Blue Ghost lunar missions and Ocula data services align with rising governmental and commercial interest in the Moon, mission complexity, schedule slips or payload funding gaps could defer milestone based payments and pressure near term earnings.
• Although the SciTec acquisition positions Firefly to benefit from increasing demand for AI enabled defense software and classified data processing, integration risk, talent retention challenges and contract timing could weigh on margins and dampen the expected uplift in software rich earnings.
• While proliferated constellations and space domain awareness needs support Elytra and Eclipse development, extended test campaigns, technical setbacks or changes in defense procurement priorities could drive higher development spending and prolong the path to scale launch revenue and improved net margins.

Assumptions

This narrative explores a more pessimistic perspective on Firefly Aerospace compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Firefly Aerospace's revenue will grow by 106.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -355.9% today to 3.6% in 3 years time.
• The bearish analysts expect earnings to reach $34.8 million (and earnings per share of $0.24) by about December 2028, up from $-395.8 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $99.4 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 188.0x on those 2028 earnings, up from -8.9x today. This future PE is greater than the current PE for the US Aerospace & Defense industry at 38.7x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.54%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Firefly remains structurally loss making with a non GAAP operating loss of $52.8 million in the quarter and negative free cash flow of $62 million. If the company cannot translate its $1.3 billion backlog and new Golden Dome and lunar wins into sustained margin expansion, ongoing cash burn and rising operating expenses could weigh on earnings and ultimately pressure the share price.
• The growth story is heavily dependent on government and defense budgets, including NASA, the Department of War and the $175 billion Golden Dome initiative. Any shift in political priorities, procurement delays such as those already seen with the government shutdown, or program cancellations could reduce contract awards and slow revenue growth.
• Alpha has experienced both a failed Flight 6 and a destructive ground test anomaly on the Flight 7 first stage. If Firefly cannot quickly demonstrate repeatable launch reliability, schedule slips, higher quality related costs and a weaker competitive position in small launch would constrain launch cadence, compress gross margins and limit earnings improvement.
• The capital intensive Eclipse medium lift rocket, multi mission Blue Ghost lander series and Elytra constellation all require large up front development and test spending. Extended test campaigns, technical setbacks or customer driven schedule changes could force higher capex and R and D, delaying the inflection to positive net margins and keeping earnings under pressure for longer.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Firefly Aerospace is $27.0, which represents up to two standard deviations below the consensus price target of $37.0. This valuation is based on what can be assumed as the expectations of Firefly Aerospace's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $65.0, and the most bearish reporting a price target of just $27.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $975.9 million, earnings will come to $34.8 million, and it would be trading on a PE ratio of 188.0x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $22.1, the analyst price target of $27.0 is 18.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.