To say FireEye Inc (NASDAQ:FEYE) has been a disappointing performer would be a considerable understatement. It has been an outright disaster. FEYE stock was initially the rage, jumping from its 2013 IPO price of $20 to $36 right out of the gate, and then racing to a high of $97.35 on the certainty that this cybersecurity outfit would soon be calling it on hot.
After all, hacking and cyberthreats were in their heyday — any outfit that could stop it would be in demand.
By the latter half of 2014 though, FEYE investors began to see an all-too-familiar shtick … FireEye was buying the bulk of its growth rather than creating it. As fast as the top line was growing, losses were growing jut a fast (if not faster). FireEye stock has fallen roughly 86% from that March-2013 peak, as doubts grew it would ever actually be able to turn a profit.
Those investors who held FEYE stock a month or even a year ago, though, may want to dust it off. Although it’s still a long shot and the company has got a ton of work left to do, the light at the end of the tunnel may not actually be an oncoming train.
FEYE: Turning the Corner
Calling a spade a spade, FireEye spent too much money on revenue-accretive acquisition and paid too little attention to its costs. Sure, you have to spend money to make money, but you don’t have to — and shouldn’t — paint yourself into a financial corner. That’s what FEYE did, however. Over the course of the last four reported quarters, the company turned $714 million worth of revenue into a loss of $555 million, versus booking a loss of $539 million on sales of $623 million in fiscal/calendar year 2015.
If one takes a closer look at the recent quarterly numbers though, one will see that for the first time ever, the loss is shrinking with revenue growth rather than widening.
It actually started in late 2015, largely unnoticed, but that turnaround has quietly picked up speed. The third quarter’s loss of $123 million on revenue of $186 million is a step forward from the loss of $135 million a year earlier, when it reported sales of $166 million.
It’s a small step, but a step nonetheless. Moreover, that step still doesn’t fully recognize the strategic overhaul relatively new CEO Kevin Mandia has directed since taking the helm in June if last year.
Meet the New FireEye Stock
Kevin Mandia has done a good — but not great — job of telling prospective FEYE shareholder about it new strategy. For those willing to take a step back and review all of the efforts though, there’s reason for hope.
One of those initiatives is the development of Helix … an all-encompassing platform that allows customers to interface with everything FireEye offers. It melds threat detection, threat intelligence and automation, and operates as on-premise software or can be run virtually in the cloud.
And prospects are taking notice. Core Networks CEO Albert Mino commented after Helix was unveiled in November, “[Helix] completely changed my view of FireEye from an appliance company to a real cybersecurity company.”
A cloud-based, full-featured service such as this will allow for steady, recurring revenue, but such a business model offers pros and cons. The key “pro” is reliable, subscription-based revenue, and the big “con” is that it’s usually low-margin revenue (particularly in a competitive market like cybersecurity).
Goldman Sachs sees more risk than reward to owners of FireEye stock, as the company transitions toward that business model, however. Analyst Gabriela Borges explained of her November downgrade of FEYE “several significant product and business model transitions [that the Street] continues to underestimate the challenges associated with transitioning from high-end hardware-based security products to a broader subscription/services portfolio [whilst competition is high].”
Borges also notes the company’s recent quarterly growth rate has been uninspiring; last quarter’s 13% and 2% improvement in revenue and billings, respectively, is the weakest progress seen in years, underscoring the downside of lower-priced subscription-based products and the fact that the company had been too reliant on acquisitions for growth.
Still, the analyst community sees more long-term upside than downside in FEYE stock. They’re looking for a swing to an operating profit by the third quarter of 2018, on the heels of respectable revenue growth for the new business model.
Bottom Line for FEYE Stock
Make no mistake — FireEye is still a fundamental mess, and will struggle to justify its value, even if it moves out of the red in late-2018.
That’s not what a trade in FireEye stock is about though. Taking a shot on FEYE stock here is a speculation that the market will sooner than later respond to the earnings trajectory rather than absolute earning levels. Thing is, that’s not necessarily a bad bet; the market has rewarded less-sound speculations.
Just bear in mind there’s still no real fundamental argument, and that can make for a very rough ride.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.