FireEye Inc (FEYE) has come a long way off its lifetime low in the last nine weeks, rising over 30% and giving long-term investors a much-needed shot of confidence. Relatively healthy buying has finally emerged and share prices seem to have gained a solid foothold around $17 to $18.
While I’m pleased to see that the short sellers who clustered around this company have moved on, I think FEYE stock needs another trigger to rekindle the rally and get the bulls back to work.
What FireEye must do in upcoming quarters is prove that its security-as-a-service model is emerging as a standard approach to fighting network threats.
Management seems confident that subscription revenue can keep climbing 35% to 50% per year, which is really all it takes to meet long-term growth targets. Investors need to see evidence of that story, whether it is retention numbers, new customer wins, proof of increased market penetration or otherwise.
Company earnings due on May 5 can go a long way, but FEYE was never a short-term play. A long ramp to profitability was already built into the models, so management just has to find a way to brighten the mood around the stock to remind people why they fell in love with it in the first place.
In the meantime, the FireEye bears may be surprised to see that quarter after quarter, management continues to deliver on its own sales goals.
What’s in Store for FEYE Stock?
Although it has been nearly a year since the stock topped $54 and went over a cliff, revenue growth hasn’t faltered more than a percentage point or two. The company that Wall Street bought in June on the prospect of $635 million in sales for the year ended up missing that mark by just 2% — barely a rounding error.
But while the recent past has played out close to Wall Street’s script, the challenge here is that FEYE’s future has gotten a bit murkier. FEYE is a stock that runs on hope and rewards patience at this stage in its lifecycle, so when optimism runs thin it’s hard for the shares to keep their balance. Revenue expectations have been reeled in about 5% since last June, taking the near end of the growth curve down to 33% this year and 24% in 2017.
At that pace, FEYE stock may scale into positive EBITDA around the third quarter of 2017. With $400 million in cash, management should be able to cover any necessary costs until that time frame with $100 million to spare. So this company isn’t really in any danger of burning through its reserves, and the narrative is more intact than the charts may suggest.
Nine months ago, FEYE stock was seen as two full years from breaking even, and the market was willing to pay over $50 for the stock. Now we’ve shaved six months off that implied time frame and the stock is trading at around $20. Upside may not come all at once, but as a long-term play, this one has real potential.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
