Congratulations to anyone who stuck with FireEye Inc (FEYE) through Tuesday’s outlook-induced weakness.
While FEYE stock fell more than 4% after the company pared down its expected losses Tuesday — the market was still hoping for a better revenue projection — Piper Jaffray and Barclay’s both convinced the market on Wednesday that the glass is half-full rather than half-empty.
Any positive chatter from analysts about FireEye is a relative victory, in that it happens so rarely. The analyst community is struggling to maintain its “hold” view on the stock, and its target price continues to drift lower.
Knowing things are darkest before dawn, Piper’s and Barclay’s revised opinions on FEYE immediately following the company’s analysis should force traders to at least acknowledge the possibility that this company has turned the corner.
What It Means for FEYE Stock
The news was superficially good. On Tuesday, cybersecurity company FireEye suggested its 2016 per-share loss would roll in somewhere between $1.20 and $1.27, vs. prior guidance for a loss of between $1.25 and $1.32.
It also affirmed revenue guidance of between $815 million and $845 million. The numbers are still at, or even better than, the consensus estimates on both fronts.
As is the case so often these days, however, estimates are tacitly meant/expected to be decidedly beat. There was nothing decided about those numbers, hence Tuesday’s pullback from FEYE stock.
Yet, there was something inspiring to analysts from Barclay’s and Piper Jaffrey.
Piper Jaffray analyst Andrew Nowinski upped the firm’s stance on FEYE from “neutral” to “overweight” and boldly beefed up his target price from $15 to $25 per share. He explained:
“The first tenet of our thesis is our belief that FireEye can successfully transition to an “as-a-service” model. This transition will result in an increase in recurring revenue, which management said can account for ~75% of the total revenue by 2020. We believe FireEye is well-positioned to execute this transition, due to the company’s best-in-class intelligence gathering capabilities… The culmination of the transition to an “as-a-service” model, growth in international regions, and a robust product roadmap targeting new markets, will lead to positive operating income in 2017.”
Barclay’s, meanwhile, maintained its “equal weight” opinion on FEYE, but did up its target price from $18 to $21, saying:
“With expenses expected to grow slower than billings/revenue given prior years of accelerated investment, profitability should improve to reach positive territory for all of fiscal 2018 and ultimately reach 15-20% in fiscal 2020.”
One analyst’s bullishness may be a fluke, but two, on the same day? Perhaps there’s something to this, especially considering they both saw and said the same thing, making mention of profitability. It’s a big deal, simply because an acquisition-hungry FireEye has for so long seemed incapable of, as well as disinterested in, actually making any money.
Click to Enlarge The adjacent graphs tell the tale. While revenue has been growing sharply for four years now, losses have been expanding just as quickly. Take a close look at the more recent accounting periods, however. For the first time ever, losses haven’t been growing even though the top line has.
A clue that FireEye has turned the fiscal corner? Probably.
Barclay’s mentioned respectable profits should appear in 2018, and widen through 2020. Those are most likely operating profits in question, as Piper Jaffray suggested; GAAP losses are still in the cards.
Nevertheless, for a market that values stocks based more in relative progress than absolute profitability, this pair of analysts may have correctly spotted the turning point for the company.
Bottom Line for FireEye
While FEYE has arguably become a decent speculative buy, it’s hardly a blue-chip investment yet. True profits are still years down the road, and there’s a massive amount of lingering negative sentiment to overcome.
But, that’s okay — most turnarounds from stocks tend to happen before it superficially seems they should, and particularly when they’re out of favor. It will also be much easier for the analyst community to turn bullish on FEYE stock now, since someone else proverbially stuck their neck out first.
In other words, for those investors who can take the heat and keep stocks on a short, disciplined leash, this pair of target-price hikes and an outright upgrade may actually be worth heeding.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
