In the wake of this month’s international political scandal involving Sony Corp (SNE) and the release of its newest cinematic farce, The Interview, FireEye Inc (FEYE) has seen a dramatic boost in share price.
FireEye stock jumped nearly 21% last week as fallout from the cyberattack left both the movie studio and the FBI scrambling. Investors saw an opportunity to take advantage of the turmoil by sinking money into FEYE and other cybersecurity companies such as Proofpoint Inc (PFPT), anticipating a rush for better protection systems.
Sony’s Inadequate Network Security Helped FEYE
The film, starring comedy duo Seth Rogen and James Franco, depicts the pair of bumbling buddies in classic Rogen style as they are recruited by the CIA to assassinate North Korean dictator Kim Jong Un.
The Interview became the focal point of a media frenzy after hackers breached Sony’s security in November and later issued death threats to Sony employees and terroristic threats that warned of 9/11-style attacks on theaters if the company released the movie.
The FBI this month accused North Korea of being responsible for the hack; the North Korean government denied the claim.
Initially, Sony cancelled the Christmas-day release of the film in response to the threats, but has since reversed its decision with a limited theatrical release, as well as releasing it immediately online.
These types of public and dramatic cyberattacks have put focus on cybersecurity companies, particularly after Sony announced it had hired FEYE to repair the damage and protect against future hacks. FireEye stock jumped nearly 21% between Dec. 17 and Dec. 23.
However, had it not been for the ongoing debacle with North Korea and the Sony hack, FireEye stock would not have jumped so impressively. Sony’s announcement clearly held sway over investors, but its decision to retain FEYE doesn’t change the fundamental facts — FireEye stock should not be on your buy list.
Why You Should Avoid FireEye Stock
FEYE shares soared in the months following its September 2013 IPO, reaching a peak of $95.63 (+166%) on March 5, 2014. Since then, shares have plummeted to around $33, a decrease of almost 65%. On May 6, law firm Ryan & Maniskas, LLP announced a class action lawsuit against FEYE, claiming that the company made false and misleading statements and promised future positive results that never materialized.
The lawsuit, regardless of its merits, simply highlights a number of significant problems and concerns with FireEye stock. For example, earnings per share were -76 cents for the first quarter of the year, followed by -82 cents in the second quarter and -83 cents in the third. Management expects fourth-quarter EPS to be -49 cents, and a full-year loss of $2.05-$2.15 per share, which is dramatically less than analyst estimates of -83 cents for the quarter and -$3.20 for the year.
Quarterly net income were losses of $101.2 million in the first quarter, $116.8 million in the second quarter and $120 million in the third quarter this year. Thanks to Sony, however, FireEye stock is likely to report better earnings for the fourth quarter, although EPS will still be well in the red.
The concern is not whether FEYE offers top quality products and services, and not whether the cybersecurity arena shows promise. It’s clear that the company’s offerings are functional and comprehensive, as a giant like Sony is unlikely to enlist FireEye’s services otherwise.
Instead, it’s FEYE’s leadership that should keep this stock out of your portfolio. In March, CEO David DeWalt sold nearly 500,000 shares of FireEye stock for just shy of $80 apiece, with the transaction taking place only days before the company released its quarterly earnings. By the end of that month, FEYE was down more than 27%, which outraged investors.
This sentiment was exacerbated by the continued decline in FireEye stock, which tanked another 60% by the end of May.
Furthermore, DeWalt’s multiple secondary offerings raised questions about the true purpose of those efforts, and his allocation of much-needed cash resources for additional acquisitions sparked outrage. Even though he apologized after FireEye stock plunged, and later attempted to minimize the apparent deficiencies across multiple quarters, the Street has not responded positively.
The IT security industry shows significant potential, so much so that Factors Advisors launched PureFunds ISE Cyber Security ETF (HACK), the first of its kind, which is up more than 8% since its Nov. 13 launch. Volatility in the space is likely to continue into 2015, as current network security providers face complex threats from an ever-increasing number of adversaries across the globe.
Finding the best stocks in this arena will be challenging, so stick with companies that have already demonstrated a solid history of positive earnings. Avoid relatively new start-ups like FEYE, especially those with questionable CEOs like DeWalt.
If you’re interested in adding some network security stocks to your portfolio, look elsewhere. FEYE is a ticking time bomb lead by a CEO with a history of poor decision-making.
As of this writing, Greg Gambone did not hold a position in any of the aforementioned securities.