Cybersecurity operator FireEye (FEYE) was one of last year’s best IPOs, with a gain of 290%. But today FEYE stock investors were not too sanguine. On the heels of the company’s latest earnings report, FireEye shares are off around 11%.
But the drop in FEYE stock is just the beginning. There has also been general weakness in the cybersecurity sector lately, as seen with Symantec (SYMC). Last month, SYMC stock took a hit thanks to weak guidance.
What’s going on here? Isn’t cybersecurity supposed to have enormous growth potential? Well, to get a sense of things, let’s take a closer look at each company.
FireEye is the mastermind of tech veteran Ashar Aziz, who launched the firm about a decade ago. He believed that the cybersecurity field was woefully behind the times. Let’s face it, the traditional approach of using signature-based scanning was too cumbersome to handle the complex threats from social networks, the cloud, virtualization and mobile devices.
So Aziz innovated a newfangled cybersecurity technology that operates in real-time and uses heuristic algorithms to learn about risks. This breakthrough has helped make FEYE stock worth over $8 billion.
Then there is Symantec. Yes, SYMC is an old-line cybersecurity player and is best known for its signature-based virus protection software. The problem? It has not kept up with the dynamic changes in the industry … and SYMC stock has been weighed down as a result.
Consider that Symantec also relies heavily on the PC market, which has been lagging. In light of this, it should be no surprise that SYMC stock has lagged as well, with only a 32% gain over the past five years. And in terms of the valuation, FEYE stock is quickly gaining on SYMC stock — which has a market cap of $14 billion.
An Uncertain Outlook for FEYE Stock
But while FireEye has been on fire, there is reason for caution — as today’s tumble shows.
Yes, there is little doubt the market dynamics continue to look robust, which should bode well for cybersecurity equities like FEYE stock. The recent data breach at Target (TGT) shows how the cybersecurity threats remain a major problem. They may not only result in financial loss but also a tarnished brand. More importantly, the threats are getting more sophisticated and may even be perpetuated by criminal organizations or countries!
Plus, FireEye has also been aggressive with acquisitions — which seems to be bullish for FEYE stock. The latest was a $1 billion deal for Mandiant, which focuses on after-breach services. The CEO and founder of the firm, Kevin Mandia, was previously a special agent in the U.S. Air Force Office of Special Investigations unit. So with his deep military connections, he has built an elite team of cybersecurity experts. For example, they were able to uncover a Chinese-based cybertheft ring that targeted American trade secrets.
Despite all this, FEYE stock is likely to remain volatile. While growth remains strong — revenues soared by 81% in the latest quarter — Wall Street has gotten carried away with expectations. For the current quarter, the consensus was for revenues of $76 million … but the company instead put out a forecast of $70 million to $72 million.
Plus, selling cybersecurity software can take time and requires lots of marketing dollars. There are also many rivals in the market, with biggies like Cisco (CSCO), IBM (IBM) and Check Point Software Technologies (CHKP).
So for investors in FEYE stock, there should be lots of caution… and there could easily be more disappointments on the earnings front.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.