Firefly Aerospace Scores Steal of a Deal on a Golden Dome Defense Contractor

How much is Firefly Aerospace (NASDAQ: FLY) stock worth?

At Tuesday's close, shares of Firefly, builder of the Alfa rocket and the second American company to land on the moon in the last 50 years, cost $28 and change. This was down marginally from Monday, but up a bit from last week, when this rocket stock touched a lowest-ever-since the IPO price barely above $26.

Firefly Blue Ghost casts a shadow on the moon. Image source: Firefly Aerospace.

Some Wall Street analysts think Firefly stock is worth a lot more than that. Deutsche Bank, for example, recently posited a $40 price for Firefly. And over the weekend, I received an email from analysts at Cantor Fitzgerald, confidently assuring me that Firefly can hit $65 within a year!

And then there's SciTec -- the defense company that Firefly just announced it intends to buy. Some way, somehow, Firefly has convinced SciTec to value Firefly stock at $50, and now SciTec is taking that stock in payment as it sells itself to Firefly.

Some in cash, some in stock

As Firefly described its offer to acquire SciTec over the weekend, it intends to pay the smaller part of its $855 million purchase price ($300 million) in cash. The larger part of its payment, however, will take the form of 11.1 million Firefly shares handed over in exchange for SciTec.

And each one of those shares will be valued at $50.

The art of the deal at Firefly

The value of any stock lies largely in the eye of the beholder, of course. That's why on any given day, one investor will happily sell a stock for $X and think she got a good price, while another investor will be just as happy to buy the stock for $X -- and also count himself lucky!

That doesn't make it any less weird, though, to see SciTec agree to value Firefly shares, tendered in payment for SciTec, at nearly twice the market price of identical Firefly shares already trading on the Nasdaq.

How did this come about? I can only imagine that Firefly initially approached SciTec, and secured its agreement to a buyout, sometime in mid-August, shortly after the Firefly IPO, when Firefly stock was still trading near $50. The financial terms were agreed to, SciTec signed on the dotted line, and Firefly required SciTec to keep the terms of the deal it originally struck when the acquisition was finally announced this month.

That's my theory, at least.

How great of a deal did Firefly get?

Whether I'm right about how the price got set though, or wrong, the fact of the matter remains: Firefly got a great deal on SciTec.

As Firefly noted in its press release announcing the acquisition, SciTec is a specialist in "mission software, rapid data processing, and low-latency AI systems that support missile warning, tracking, and multidomain operations." It's a defense contractor, in other words, specifically a defense contractor that owns a lot of technology that could be useful when bidding on contracts to build President Trump's Golden Dome missile defense system.

Firefly CEO explained that buying SciTec, therefore, "enhances our ability to support a growing number of defense missions and provides us with a significant operational advantage," especially when competing for Golden Dome contracts.

The deal also diversifies Firefly's revenue stream. No longer a start-up of a space stock with barely $100 million in annual revenue, buying SciTec and its $164 million annual revenue stream will transform Firefly into a more equally weighted 60/40 defense/space business. It will also more than double the company's total annual revenue stream to more than $260 million.

And at Firefly's current market capitalization of $3.9 billion, it will also give Firefly a much more reasonable-looking price-to-sales ratio of about 15. That's still not cheap for a space stock, exactly. (Historically, 4x sales has been a more common valuation for unprofitable space stocks.) But it's a lot cheap-er than when Firefly is valued on its pre-SciTec revenue -- costing roughly 39 times trailing sales.

A steal of a deal

Speaking of price to sales valuations, I can't fail to mention the bargain price Firefly is getting for SciTec. Valued -- as I just mentioned -- at 39x sales itself, Firefly is paying a mere 5.2x trailing sales for SciTec.

Say what you like about the excessive valuation of Firefly's own stock today, but the company's making smart use of its richly valued stock to snap up a much cheaper subsidiary at a bargain price, and dramatically grow its revenue stream in the process.

Firefly shareholders should applaud the move.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.