Cybersecurity stocks have taken a hit over the past few years, but there has been one company that has made that bearishness look downright placid — FireEye Inc (NASDAQ:FEYE).
FEYE stock has lost value for the past three years, and now trades a long way from its all-time high of $85 in early 2014.
Indeed, FEYE has many issues. There’s the drastic slowdown in sales, the abrupt departure of the CEO last year and, of course, the intense competitive environment. Not the least of which is FireEye’s meandering transition to the cloud and its hesitancy to adopt next-generation technologies.
In light of all this, is it any wonder that FEYE stock has been so terrible? Nope.
But when it comes to investing, there are often nice opportunities with contrarian plays. So might this be the case with FireEye stock? Well, to see, let’s take a look at three pros and three cons:
FEYE Stock Pros
Still a Solid Company: It does seem overblown that FEYE stock is headed for near oblivion. The fact is that the company still has an impressive business, with a wide array of products and services. In the latest quarter, FEYE added 287 new customers and there were 47 that entered into transactions in excess of $1 million. The total customer account is over 5,000 and more than 940 are on the Forbes Global 2000. As for revenues, they came to $186.4 million in the most recent quarter. In all, there is $926.2 million in the bank. Consider that the market cap of FEYE stock is only about $2.2 billion.
Strong Leadership: CEO Kevin Mandia has wasted little time in making serious restructuring efforts. Then again, he is one of the top influencers in the cybersecurity industry. He started his career in the United States Air Force as a security officer and then as a cybercrime investigator in the Air Force Office of Special Investigation. After these stints, he went into the private sector, having worked at various firms like Sytex, and also co-authored two well-regarded books. Then he went on to launch Mandiant in 2004, eventually selling the company to FireEye in 2014.
In other words, Mandia has a rare blend of deep experience with the technical aspects of cybersecurity and also how to build successful companies. So regarding the product line, a key part of his strategy is to offer more affordable solutions so as to cater to smaller customers. To this end, FEYE has launched FireEye Essentials. But, of course, another high priority is the cloud, which is part of the FireEye as a Service (FaaS) platform. Some of the recent product launches for this include Cloud MVX — which does not require a hardware appliance and is priced on a subscription basis — and MVX Smart Grid (this is for those companies that prefer on-premise approaches, such as in industries like financial services and healthcare).
Then there are other important tools like the FireEye Security Orchestrator, which manages threats and responses across massive organizations. As a testament to its power, a government agency made a seven-figure purchase of the software during the latest quarter.
Secular Trends: More than ever, we rely on core technologies that are becoming essential to everyday living. No doubt, there is the ubiquity of smartphones and wearables. But with the Internet of Things, there is the growth in technology for autos, homes and even medical devices. Protecting these systems from cyberattacks is only getting more complicated. As a result, the growth for the industry is likely to remain strong for the long haul. According to a report from IDC, the global spending is expected to jump from $73.7 billion in 2016 to $101.6 billion by 2020.
FEYE Stock Cons
Growth Issues: The deceleration of the top line has certainly been dramatic. During the first quarter of 2015, revenues soared by 69% to $125.4 million. Yet for the latest earnings report, there was only a 13% gain. Keep in mind that FEYE expects the situation to get even worse. The guidance for the fourth quarter is for revenues of $187 million to $193 million, which would translate to an increase of 1.2% to 4.4%. It’s important to note that a big part of the reduction has come from the transition to a subscription business model, which means not as much revenue can be recognized up front. Despite this, there is little doubt that FEYE has been losing momentum. That’s why the company has focused on restructuring its operations.
Competition: It’s intense for the cybersecurity market. Just some of the top operators include Fortinet Inc (NASDAQ:FTNT), Palo Alto Networks Inc (NYSE:PANW), Check Point Software Technologies Ltd. (NASDAQ:CHKP) and Proofpoint Inc (NASDAQ:PFPT). But some mega tech companies have also moved aggressively into the space, such as Cisco Systems, Inc. (NASDAQ:CSCO). But perhaps the biggest threat is from the startups, which have the benefit of a flush venture capital market. The fact is that a technology lead can easily disappear — and it can be very tough to regain it. A prime example of this is Symantec Corporation (NASDAQ:SYMC), which relied too long on its antivirus franchise and did not make enough investments to refresh its product offering.
Losses: FEYE has been a consistent money loser. True, this is fairly common throughout the cybersecurity industry. But then again, losses become much more of a problem when sales are rapidly falling! Unfortunately, there are no signs that FEYE will hit profitability anytime soon. For the current quarter, analysts expect a net loss of 16 cents a share. The company has made progress with reducing costs, yet as InvestorPlace Media’s James Brumely noted recently: “… 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.”
Bottom Line on FEYE Stock
Tech turnarounds are always difficult, and many fail. But again, FEYE has a CEO with a strong background and is making smart decisions. Actually, the company is already starting to see positive results.
Besides, the valuation is fairly reasonable. Consider that FEYE stock trades at about three times its sales. By comparison, both PANW and Cyberark Software Ltd (NASDAQ:CYBR) sport multiples of about eight times sales.
OK then, should you buy FEYE stock now? I think so, given that it looks like a good value play on a growth industry.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.