Why Firefly Aerospace Stock Collapsed 35% Last Month

Key Points

• Firefly's rocket exploded on the launchpad in September.

• The company has a large backlog but little current revenue.

• The stock is a risky bet since it just went public and is unprofitable.

• 10 stocks we like better than Firefly Aerospace ›

Shares of Firefly Aerospace (NASDAQ: FLY) fell 35.4% in September, according to data from S&P Global Market Intelligence. The recent initial public offering (IPO) stock and rocket launch provider had an explosive misfire when testing one of its rockets late last month. As an early-stage developer of rockets trying to compete with SpaceX and Rocket Lab, seeing rockets explode on the launchpad is a negative for building its brand with potential launch customers.

Here's why Firefly Aerospace stock fell last month and what it means for the company going forward.

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Recent IPO, test-fire mishap

Firefly Aerospace has developed spacecraft and rockets to serve the growing space economy. It works on missions for both commercial and government customers, and earlier this year, it worked on the first commercial moon landing with the Blue Ghost Mission 1. This perhaps led the company to time its IPO earlier this summer, raising close to $1 billion in the process to fund future development. As of its second-quarter update, Firefly Aerospace claimed a backlog of $1.3 billion compared to just $15 million in revenue last quarter.

Clearly, Firefly is skilled at winning customer contracts. But as a space economy company, it needs to prove it can be a reliable launch and spacecraft partner to keep these contracts.

On Monday, Sept. 29, Firefly's Alpha rocket exploded on the launchpad. As of the last quarterly update, Alpha has had only six launches to date, meaning the company does not have a long track record of successfully launching missions for customers. Not only do frequent mishaps on the launchpad mean more costs for Firefly, but they can also quickly ruin its reputation in the industry. For comparison, Rocket Lab's Electron system has done 70 missions, with mishaps few and far between.

Image source: Getty Images.

Is Firefly Aerospace a buy?

Given the excitement around space start-ups, Firefly's IPO was oversubscribed when the company debuted in early September. Raising a lot of money will help the company continue its development in rockets and spacecraft systems, which take a lot of upfront spending before turning a profit.

Even though Firefly claims a large backlog of customer contracts, it may be wise for investors to wait to buy the dip on this stock. For one, most IPO stocks tend to underperform in the year after going public, putting the odds against any investor buying shares today. Second, Firefly's valuation is not cheap despite this 35% drawdown.

The stock currently has a market cap of $4 billion compared to just $100 million in trailing revenue, or a price-to-sales ratio (P/S) of around 40. These are wild expectations for a space company that is unprofitable and has rockets blowing up on the launchpad. If you are excited about space economy stocks, keep Firefly Aerospace on the watchlist, but don't buy the dip after its post-IPO drop in September.

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Rocket Lab. The Motley Fool has a disclosure policy.