Why FEYE Stock Fell 12.5%
FireEye Inc (NASDAQ:FEYE) delivered quarterly earnings on Thursday and the market reception was…frosty, to say the least. Within hours, investors carved out 12.5% of FEYE stock.
Although the company’s bottom line was better than expected, there was some trouble at the top end of FireEye’s report. Sales of the company’s software products and services grew less quickly than forecasters had predicted, which threw investors into a frenzy.
On Wall Street, there’s nothing worse than a missed estimate. It didn’t matter that FireEye beat earnings expectations or that it laid out some strong guidance. What hurt FEYE stock was one number that underperformed over the last three months.
A market purist could look at that situation and think it’s perfectly fine. The stock market did what it’s supposed to by taking a bite out of FEYE stock, right? Wrong.
Think about it this way: time horizons matter. Judging performance based on three-month intervals is an absolutely crazy way to think about a business, especially when you’re trying to determine what that business will be worth two or three years down the road.
Once you start thinking about FEYE stock with an extended time horizon, this earnings report doesn’t look that bad. Yes, FireEye lost $0.33 per share, but analysts were expecting the losses to be even wider. They had predicted a burn rate of $0.39 per share. (Source: “FireEye plans layoffs as new CEO takes the helm, stock plunges,” MarketWatch, August 5, 2016.)
Not to mention that FireEye got a new CEO only two months ago. The guy barely got enough time to settle into his chair before markets started panicking about the direction of FireEye’s sales growth. Breathe easy, dear reader. I’ve given this plunge in FEYE stock a closer look and it doesn’t seem justified.
Here’s my take…
A Late 2016 Rebound for FEYE Stock?
The new CEO is Kevin Mandia, a guy who came into the company through an acquisition. FireEye had bought Mandiant, which was a private cybersecurity firm that helped clean up the infamous Sony hack, tracing it back to North Korea.
After that, Mandia became famous, so much so that he was featured on the cover of Fortune magazine. Considering Mandia and his company’s demonstrated success, FireEye decided to “acqui-hire” Mandia and his little cybersecurity contractor. (Source: “FireEye Names New CEO After Months of Rumors,” Fortune, May 6, 2016.)
Now Mandia has the keys to the castle. His first order of business as CEO is to strip the fat off FireEye, most notably by laying off 10% of its entire workforce. That may sound harsh, but there’s little else to be done. The company needs to make money at some point—it can’t burn cash in perpetuity.
“We always knew somewhere around 2016, we’d have to change this company as we got scale, and we want to maintain the timeline for achieving non-GAAP profitability,” he said from the company’s Milpitas, California headquarters in a telephone interview. “I want to balance growth with profitability, and we’re serious about that path to profitability.” (Source: MarketWatch, op cit.)
Mandia’s plan could end up saving FireEye $80.0 billion a year. The savings could actually start to take effect as early as the fourth quarter of 2016, meaning the company’s cost base should shrink significantly. Estimates suggest we’re looking at a $20.0-million reduction straight off the bat. That’s not a bad target for the first six months of a new job.
But Mandia didn’t just leave it at cost-savings. He’s hoping to generate non-GAAP profits within the next three quarters. By his logic, the industry is still in flux. Changing geopolitical circumstances and an evolving security environment are altering the demands on cybersecurity companies. Clients are looking for full-service solutions.
It’s going to take time for FireEye to figure out what those solutions will look like, but they need to buy that time by giving shareholders a reason to believe in FEYE stock.
They need to trim unnecessary costs, generate positive cash flow, and then re-accelerate revenue growth. Funnily enough, that’s exactly what Kevin Mandia is doing right now.
He’s making the right moves to ensure a bright future for FEYE stock, but investors aren’t paying attention. They’re too blinded by quarterly capitalism to recognize a good stock when they see it, but non-GAAP earnings in Q4 should turn the company around.
That being said, FEYE stock isn’t at the top of our watch list. Don’t me wrong; it’s an incredible company and we’re certainly bullish on it, but there’s another investment that is a complete game changer. The stock I’m talking about has surged 774% in the last five years and it’s showing no signs of slowing down! Click here for our Free Exclusive Report on how you can tap into these extraordinary gains.