The stock price of FireEye Inc (NASDAQ: FEYE) went up as much $15.54 per share on September 1, 2016 but erased some of its gains in the afternoon trading. FEYE stock closed at $15.19 per share, which was still up by nearly six percent.
No major event or announcement could have triggered the upward movement of FEYE stock. In fact, many investors have a bearish sentiment on FireEye because the company remains unprofitable.
The cybersecurity firm reported losses over the past four quarters. Its revenues were also below the consensus estimates of Wall Street analysts during those periods. In short, FireEye stock is a disappointment for investors.
|FireEye Inc Quarterly Financial Performance|
|Quarter||Reported Earnings/Losses Per Share||Consensus|
|2Q16||-$0.33||-$0.39||$175.05 million||$181.67 million|
|1Q16||-$0.47||-$0.50||$167.1 million||$172 million|
|4Q15||-$0.36||-$0.37||$184.77 million||$185.32 million|
|3Q15||-$0.37||-$0.45||$165.62 million||$167.22 million|
In fact, the company’s share values lost more than 61% over the past year, or nearly 27% year-to-date. The sudden surge of FEYE stock made some people wonder if the cybersecurity firm is beginning to pull itself up from the ditch. Is it time to buy FireEye stock or is it still too risky?
FireEye Inc. Remains an Attractive Takeover Target
I think that the ongoing speculation that Cisco Systems, Inc. (NASDAQ: CSCO) and International Business Machines Corp. (NYSE: IBM) may be considering a bid to take over the company pushed FireEye stock higher again.
The continued underperformance of the cybersecurity firm is a convincing reason for market observers to suggest that it is a takeover target. Besides its technology, it could be a great complement to the security products of Cisco or IBM. Both tech giants have been strengthening their security business due to the rapidly growing incidence of cyber-attacks and hacking across industries.
Additionally, FEYE stock at $15.19 per share is currently trading way below its $53.65 stock price on June 19 last year, which makes it a very desirable takeover target. There is no reliable information regarding a potential acquisition, so all of the talk about it is just rumors. Betting on FireEye stock based on a rumor is unwise.
Is FireEye Stock on the road to profitability?
As discussed above, FireEye is not making money, but is the company pivoting toward profitability? The answer is yes. During the first quarter, the company announced changes in its senior management (which took effect on June 15) and it announced a restructuring plan in the second quarter.
David DeWalt vacated his position as CEO and assumed the role of an Executive Chair to focus on increasing the adoption of “FireEye Threat Management Platform,” and the company’s multi-channel go-to-market strategies. (Source: “FireEye Reports Strong First Quarter Results as Growth of Platform Billings Accelerates,” FireEye Inc, May 5, 2016.)
Kevin Mandia, who previously served as president of the company stepped up as CEO. He was the founder of Mandiant, the computer forensic firm acquired by FireEye in 2014. Mandia caught and exposed that China’s People’s Liberation Army was hacking and spying on American companies to steal their trade secrets. (Source: “The CEO who caught the Chinese spies red-handed,” Forbes, July 8, 2013.)
Mandiant president Travis Reese became president of FireEye while Michael Berry assumed the role of COO in addition to his responsibilities as CFO.
Some market observers believe that FireEye’s new senior management is capable of maneuvering the firm on the road to success. The company’s board of directors approved a restructuring plan and workforce reduction. The move would reduce its operating expenses and align its cost structure with its current growth prospects to deliver non- generally accepted accounting principles (GAAP) profit in the fourth quarter of 2017.
Management estimated that the reorganization would cut its total non-GAAP costs by $20.0 million in the last quarter of 2016. It also expected to record pre-tax charges of around $15.0 million to $20.0 million to its GAAP financial results for the third quarter this year. (Source: “Form 10-Q,” FireEye Inc, August 5, 2016.
It is important for FireEye to cut its expenses to make money and generate positive free cash flow, which can be used to expand its operations, develop new products, distribute dividends, or repay its debt.
Furthermore, management is revitalizing its growth by focusing on three key product development initiatives: expanding “FireEye as a Service” (FaaS) to address a broader range of threats, leveraging the “MVX” detection to deliver new cloud-based and hybrid security products, and extending its “Endpoint” product by adding real threat detection. These initiatives would allow the cybersecurity firm to address larger markets that are ripe for disruption and expand its customer base.
Note that FireEye’s renewal rate for subscriptions expiring by the end of the second quarter was more than 90%. The renewal rate is an important metric to determine the long-term value of its customer agreements with its ability to retain customers. The percentage shows that its clients are loyal and happy with its products.
Management expects an improvement in FireEye stock’s financial performance going forward. FireEye stock is expected to deliver a non-GAAP net loss of around -$0.30 to -$0.32 per share and revenue in the range of $180.0 million to $186.0 million for the third quarter. The company posted a non-GAAP net loss of $0.33 per share and revenue of $175.05 million in the previous period.
The Bottom Line For FEYE Stock
FireEye has a senior management that is committed and capable of turning around the company toward growth and profitability. Many of the world’s largest governments and organizations are using the firm’s solutions to secure their computer systems against cyber-attacks. Right now, FireEye stock is accompanied by many risks, but I believe it has the potential to go up. If you are the type of investor who can withstand high risk and be patient to wait for fruits of the company’s turnaround efforts, then you might consider buying the stock.
The cybersecurity market is expected to reach $202.36 billion by 2021 due to the escalating security breaches targeting enterprises as well as the growing Internet of Things (IoT), Bring Your Own Device (BYOD) trends, and deployment of Web- and cloud-based applications. (Source: “Cyber Security Market worth 202.36 Billion USD by 2021, Markets and Markets, last accessed September 1, 2016.)
FireEye is making progress in developing the most comprehensive global threat management platform. Therefore, it is in a strong position to compete and gain substantial market share in the cybersecurity industry.
Among the 31 brokerage firms covering FireEye stock; four had a buy rating, five suggested an outperform rating, and 22 recommended a hold rating. The 12-month median price target for FireEye stock is $16 per share, which is an upside of 11.3%, and the highest price target is $33.00, which is an increase of 129.8%.