Cisco Systems Inc (NASDAQ:CSCO) didn’t acquire FireEye Inc (NASDAQ:FEYE) like investors thought — so what? Who cares FEYE stock is flat in the last three months. FEYE stock is still up 43% in the past six months, compared to gains of 5% for the NASDAQ and a measly 1% for the S&P 500.
Sure, past gains are nothing to hinge an argument on, but FEYE stock still has a lot of upside potential, and any dips should be looked at as the bargains they are.
Allow me to explain.
For a stock like FEYE, top-line increases are more important than bottom line profitability, and FireEye is all about growth right now — whether it’s revenue growth, subscriber growth and service growth, all are important to the top line.
Plus, demand for cybersecurity continues to increase, and FEYE has one of the best cybersecurity systems around, making it a no-brainer buy.
FEYE Revenue Matters Most
FEYE may not have positive earnings yet, but it is a growth company that’s still in growth mode. FireEye’s revenue stream reflects that, and its earnings report last month showed FEYE revenue grew 69% year-over-year, with billings up an additional 53%. In just one year, FireEye increased its customer base by nearly 55%, from 2,200 to 3,400 in the most recent quarter.
In its current quarter FEYE is expected to generate between $140 to $144 million in revenue. That’s another 50% in sales growth, which should help both the top and bottom lines.
And the deals keep coming for FireEye. The company strengthened its platform by acquiring Mandiant, and FEYE saw tremendous enthusiasm in its platform in Q1.
In Q1, FEYE started a whopping 28 new partnerships, all worth at least $1 million, including deals with Hewlett-Packard Company (NYSE:HPQ), Samsung Electronics Co Ltd (OTCMKTS:SSNLF) and Check Point Software Technologies Ltd. (NASDAQ:CHKP).
FireEye CEO Michael Sheridan pointed out to The Wall Street Journal late last year that, while FireEye is losing money currently, that hasn’t always been the case. Sheridan cites 2012, a year FEYE generated $22 million in cash on revenue of $83 million, and he remains faithful his cybersecurity business is one that could be turned back toward profitability.
So why hasn’t FEYE turned that ship around already? It’s simple, really — market share. FireEye can use its cash burning position to “aggressively” pursue the old guard of the cybersecurity market, like Symantec Corporation (NASDAQ:SYMC).
FireEye is predicting it will return to profits over the next four years as revenue from its subscription-based billing starts to materialize, which FEYE management shows in the chart above. The gap between losses and profitability is already closing, and analyst earnings estimates continue trending closer to positive.
Demand for Cybersecurity Continues to Surge
Cybersecurity is expected to grow at a Compound Annual Growth Rate (CAGR) of about 10% to reach $155.79 billion by 2019, according to Markets and Markets.
The largest contributors to this growth are in aerospace, defense and intelligence, and FEYE is the only cyber security firm considered by the SAFETY Act a “Certified” provider of “Qualified Anti-Terrorism Technologies”.
Every time a company is hacked on a news-worthy level, cybersecurity stocks go up. FEYE’s bread-and-butter is in detecting “day-one” threats, even detecting a breach in Target Inc (NYSE:TGT) that TGT’s own CEO notoriously failed to see (and was subsequently canned for).
FireEye’s security capabilities make the company one of the elite firms for cybersecurity protection.
The Bottom Line
Cyber threats are a serious issue, and as more devices than ever are connected in the Internet of Things, and as more data than ever is stored in remote servers due to the cloud computing surge, demand for cybersecurity will only increase further from here on out.
As many as 70% of IoT devices are vulnerable to attacks, while 56% of organizations believe their firms are “highly unlikely” to spot a sophisticated attack on their own.
Cloud computing also brings major risks, as companies are increasingly at risk due to the sheer amount of data stored in the cloud and devices transmitting sensitive information around the clock.
As the needs for security in the digital space grow more complex, FireEye is increasingly becoming the cybersecurity solution to turn to.
As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.
