FireEye Inc (FEYE) Stock Hit A Bottom … But Not THE Bottom

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FEYE stock - FireEye Inc (FEYE) Stock Hit A Bottom … But Not THE Bottom

Source: David via Flickr (Modified)

Congratulations to anyone who stuck with FireEye Inc (NASDAQ:FEYE) all the way through yesterday evening’s earnings report. Although the perpetually weak name saw an accelerated move to new lows beginning in early October, the company reported a pleasant earnings surprise for its third quarter. FEYE stock is up 16% today as a result.

FireEye FEYE stock

Now, get out!

It’s unlikely FireEye stock has suddenly turned the ship around in a way meaningful enough to make the stock ownable for anyone but swing-trading speculators.

That’s apt to be a tough pill to swallow for some FEYE stock holders who finally think they see a light at the end of the tunnel with a new CEO at the helm. As they say, though, numbers don’t lie.

FireEye barely made a dent in its fiscal shortfalls. And there’s still no reasonable assurance it’s going to reach the promised land of profits anytime in the foreseeable future.

FireEye Earnings

FireEye is one of several cybersecurity stocks that has moved into the limelight in recent years as computer hacking and cyber-espionage has turned into a rampant problem. FEYE competes with names like Check Point Software Technologies Ltd. (NASDAQ:CHKP) and Palo Alto Networks Inc (NYSE:PANW).

While the need for the protection these companies supply has soared, net profits — and even operating profits — have mostly remained elusive for the industry.

FireEye hasn’t been an exception to this reality. In its recently completed fiscal third quarter, the cybersecurity company lost $123.4 million, or 75 cents per share of FEYE stock, on $186.4 million worth of revenue. On a non-GAAP operating basis, the loss was just 18 cents per share.

Those are all improvements on year-ago figures. In the same quarter a year earlier, the organization lost 37 cents per share on an operating basis, or 88 cents on a GAAP basis, on sales of $165.6 million. Analysts were collectively expecting a loss of 31 cents per share and a top line of $183 million. The earnings outlook for the current quarter was also better than expected, even if FEYE’s sales guidance fell a bit short of analysts’ estimates.

What’s wrong with a decent beat? Nothing. The hurdle is, once the dust settles on the relative beat, it will become clear once again to the market that FireEye is still miles away from actual viability.

Reality Check

In some regards, one has to feel sympathy for new CEO Kevin Mandia, who took the helm in May of this year. He inherited an organization that’s not only been bleeding money for years, but has been inching away from profitability rather than toward it as it scaled up.

To his credit, the company mustered a measurable step in the right direction last quarter, with a deliberate cost-cut effort (mostly layoffs a few weeks ago) shrinking the size of the loss. The scope of that progress for FireEye, however, was tantamount to trying to extinguish a four-alarm fire with a squirt gun.

Take another look at the top and bottom line for the third quarter.

FEYE generated revenue of $186 million and still managed to lose $123 million. When the GAAP loss is two-thirds the size of your top line, something significant is wrong. The company isn’t even close to reaching real viability when one digs deeper into the numbers.

Case(s) in point: Last quarter, the cost of revenue was 37% of revenue, versus 37.3% for the third quarter of 2015. In the third quarter of last year, total operating expenses were 37% more than revenue, while last quarter, operating expenses still exceeded revenue by 22.6%. That’s a marked improvement. But an even closer inspection reveals that relative improvement almost entirely came from the $10.7 million reduction in R&D spending — a cost cut that may come back to haunt the company in the long run.

Either way, it’s in this light one begins to understand just how much more work the organization has to do.

FireEye will have to pare back expenses by more half of their current levels without crimping its marketability to have any shot at ever turning a profit. That’s a tall order made even taller by the fact that the projected growth rate of cybersecurity spending is starting to slow down.

Bottom Line for FEYE Stock

None of this is to suggest FEYE shares won’t respond bullishly to the news. Indeed, they already have. That’s a relative-driven response, though, prompted by the direction the company is facing. Once they’ve had a few nights to sleep on it, investors will recognize that while FireEye is pointed in the right direction, it’s still agonizingly far away.

It will be a not-so-small miracle if FireEye doesn’t run out of time and money before getting to the endzone. A fundraiser can only work against the stock’s value from here, and an acquisition is a long shot at best — nobody wants to buy a boat with a leak in it.

In other words, Friday’s bullishness in FEYE stock wasn’t built to last.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Note: FireEye CEO Kevin Mandia’s name was misspelled in an earlier version of this story. We apologize for the error.


Article printed from InvestorPlace Media, https://investorplace.com/2016/11/fireeye-inc-feye-stock-bottom-iplace/.

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