It has been a rough ride for FireEye Inc (NASDAQ:FEYE) stock. FEYE stock went public in September 2013, priced at $20 per share. FireEye doubled on its first day of trading; it cleared $90 by March. A quick plunge followed, and after a modest rebound, shares have been in a consistent downtrend, falling from above $50 in June 2015 to a current price around $11.
With FEYE stock now near an all-time low, investors are looking to see if there’s a way to salvage some value.
FireEye itself has been in the middle of a turnaround, to be sure. The company has cut costs, and worked to shift from legacy hardware products to a more cloud-based model. But the departure of the chairman and CFO after last week’s Q4 earnings report could hamper those plans. Already, restructuring has left several key positions open and affected FireEye’s sales and marketing efforts.
There is a case for the company to be a takeover target, which almost certainly would value FEYE stock above current levels. But investors expecting a deal in the near-term seem likely to be disappointed. FireEye could be of interest to a larger player, but it still has a lot of work to do.
What FireEye Needs To Do
It’s always tempting to see a M&A opportunity in a growth stock that has fallen on hard times. According to a Bloomberg report last year, FireEye already has turned down several buyout offers. Those deals almost certainly would have been struck at a price much higher than $11. Surely, the rumored buyers — among them International Business Machines Corp. (NYSE:IBM) and Cisco Systems, Inc. (NASDAQ:CSCO) — would still be interested at a lower price?
The problem, however, is that FEYE’s business looks much worse than it did even six months ago. 2016 as a whole doesn’t look that bad, to be sure: Revenue increased 15% over 2015, and the company managed to cut non-GAAP operating expenses by 3% at the same time. That combination moved FireEye closer to profitability: The non-GAAP loss narrowed from $1.61 per share to $0.99 per share.
Those numbers don’t show the real issue, however. Billings, which reflect revenue added in the quarter — not necessarily recognized sales — increased just 3% for the year. More concerning: That figure became progressively worse as the year went on. In Q1, billings growth was over 20%; in Q3, the figure increased just 4%. Q4 billings then declined 14% and the midpoint of Q1 guidance implies a 25% decrease next quarter.
Nothing good will happen for FEYE stock until that trend is reversed. Acquirers don’t want to buy a declining business. FireEye is already both unprofitable and burning cash. Declining billings will only worsen its losses. And FEYE can’t blame its market. Peer Fortinet Inc (NASDAQ:FTNT) announced 22% billings growth in its first quarter on the same day FEYE stock was plunging after its report. To be even considered as an M&A target with a market cap still over $2 billion, FireEye has to fix its sales problems.
Can FEYE Stock Rebound Through M&A?
For its part, FireEye management believes those issues will be fixed. After Q4, outgoing CFO Mike Berry said the company would return to growth in the second half of 2017. New cloud-based offerings and the recently rolled out Helix platform are projected to start boosting sales by then.
The huge decline in product billings — down 50% in Q4, and guided the same in Q1 — will start to be lapped. And CEO Kevin Mandia pointed out on the Q4 call that FireEye for months had no head of sales, either worldwide or in Europe.
Combined with easy comparisons, FEYE expects to get back to billings growth toward the end of this year, which likely would translate into revenue growth in early 2018. But until that happens, it’s hard to expect much in the way of M&A interest.
While FireEye seems confident in its prospects, the price of FEYE stock shows that many observers remain skeptical. The company is shifting from products to clouds, but there’s a real concern that it’s “too little, too late,” with rivals like Fortinet and Palo Alto Networks Inc (NYSE:PANW) having beaten FireEye to market.
Any sale of FEYE is going to depend on that top-line rebound taking place. Lower spend is nice in the near-term, but isn’t going to be the primary consideration of a strategic acquirer like IBM or Cisco. A larger company looking to enter the cybersecurity market through a takeout of FireEye stock is going to plan for substantial cost cuts regardless. Whether FEYE makes those cuts in 2017 or IBM does so in 2019 doesn’t much change the possibility of a takeover — or the price to be paid for FireEye stock.
Simply put, it’s revenue that will drive FEYE’s attractiveness as an M&A target. Thus, it’s revenue that will drive the performance of FireEye stock this year. Sales performance seems to hinge on whether the company succeeds in pivoting away from its legacy appliance business. That puts a lot of pressure on Helix, in particular. The platform may rise to the challenge, to be sure. But any investors expecting a takeout of FEYE stock should at the least, be patient. FireEye has a lot to prove before bigger companies come calling.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
