While the marketwide bounce back from Wednesday’s steep intraday selloff is certainly lending a hand, there’s little doubt that the bulk of the rally from FireEye (FEYE) on Thursday was driven by news of its acquisition of cybersecurity firm iSight, lengthening the list of companies FireEye has assimilated over the past several years.
The superficial optimism is understandable — iSight has a capability FireEye needs, which arguably makes FEYE stock worth more (the whole is greater than the sum of its parts).
Still, at some point — and sooner than later — fans and followers of FireEye are going to start wondering if these deals are making the company fiscally better, or just bigger?
The answer may not be one many people like.
What’s iSight?
Though the specific closing date hasn’t been announced yet, the $200 million check for iSight was written on Jan. 14.
It’s a compelling pickup. FireEye is a well-established cybersecurity name with a wide array of products and services resulting from several acquisitions made between 2013 and 2015, but iSight brings something new to the table — a comprehensive cyberthreat intelligence service.
Simply put, iSight allows companies to understand, and even predict, cyberattacks by building an entire “who, what, when, where, why and how” profile of potential threats.
FireEye CEO David DeWalt explained:
“The biggest mistake most people make is thinking threat intelligence is a collection of virus definitions in a shared database. Forward-looking security organizations — from governments to the private sector — know threat intelligence is the key to establishing a robust security posture tuned for the threats targeting each organization.”
What FireEye didn’t divulge, however, was the amount of revenue iSight will bring to the table, and perhaps more important at this point, how much iSight will add to the bottom line … if any.
Is There an End in Sight?
Though, unrelated to the acquisition, FireEye also told FEYE stock owners that its fourth-quarter (which ended in December) revenue would roll in somewhere between $184 million and $185 million, right in the middle of the prior guidance of $182 million and $190 million.
That’s well above the $142.9 million in revenue reported for the same quarter a year earlier, though still less than the $186.9 million analysts are calling for this time around.
No earnings guidance was offered, as is usually the case for a company posting recurring losses. Analysts, however, have still collectively opined for a loss of 37 cents per share. That’s only a penny better than the Q4 2014 per-share profit FEYE stock raked in, topping off a fifth straight year of widening losses.
It begs the question — at what point will greater scale actually start to improve the bottom line rather than make it worse? That is, after all, the whole point of a roll-up strategy.
The chart below illustrates the mostly unspoken concern. Sales have been rising since FireEye started its buying spree a couple of years ago, but the operational bottom line isn’t one bit better.
That’s not to say a young and growing company shouldn’t be given a wide berth, especially one that’s clearly in acquisition mode. After two years, though, one would expect to see a glimmer of hope for sustainable profits.
For the record, the analyst community collectively thinks 2015 was a turning point, meaning that as of this year FireEye should start to narrow losses on a growing top line.
That’s a questionable outlook though, given how unfruitful all of its acquisitions have been to date. And even if analysts are on target, FireEye won’t be producing any real net profits until 2019 at least. That’s a long time to wait given how much buzz this company has managed to create for itself.
Bottom Line for FEYE Stock
This isn’t to say FireEye is doomed and FEYE stock is destined to torpedo any portfolio it touches. Indeed, with the cybersecurity market expected to be worth $170 billion within five years, that rising tide alone could lift FireEye to profitability.
On the flipside, after two years, it’s time to start asking how much, if any, real organic growth FireEye has achieved, and how much (again, if any) synergy it has managed to find. At some point in time it’s got to build its own business rather than simply buy existing ones.
With that in mind, the iSight acquisition doesn’t look quite as thrilling. Which apparently the market agrees with, as FEYE stock is now off nearly a percent with minutes until the closing bell.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
