FireEye Inc (NASDAQ:FEYE) can’t catch a break. FEYE stock, already down more than 85% from its 2014 peak, plunged again Feb. 3 amid a complete whiff on its most recent earnings report.
Revenues were especially hairy, falling well short of already diminished expectations. First-quarter expectations were also far below what the Street was hoping to see. And a management shake-up was announced, to boot.
FireEye stock reacted as one might expect, dropping some 17% in Feb. 3’s early-morning trading to just above the $10 level.
So, many investors are asking themselves: On such a large and prolonged dip, is it finally time to buy FEYE? Or should investors steer clear?
FEYE Stock Cons
Mounting Losses: In 2011, FireEye lost $17 million. The next year, losses increased to $36 million. In 2013, the company’s losses topped $100 million. Things really started to get out of hand in 2014, when losses surged to $444 million. FEYE then broke the half-billion mark in 2015, and 2016 was hardly better.
This is the opposite of a scale effect; the more FireEye produces in revenue, the more money it seems to lose.
The balance sheet is starting to take a hit as well. As recently as 2014, the company had no debt. It’s now up to more than $700 million in IOUs, and its net cash position is slipping. Lest one think the losses are all accounting-driven, it’s worth considering that FireEye has never produced a year of positive free cash flow, either.
Something needs to change, and quickly; FireEye has an increasingly ugly earnings record.
Revenue Misses: Investors will forgive a growth company for losses for quite awhile on occasion. However, losses combined with a growth slowdown is a brutal combination. Investors have punished FEYE stock because management seems confused as to why its growth is decelerating.
At the end of 2015, for example, FireEye projected $815 million-$845 million in revenues for 2016. In Q1, they cut this estimate to $780 million-$810 million. FEYE further slashed as the year progressed, and the latest update was merely $716 million-$722 million. With Thursday’s earnings release, even that number ended up being too optimistic. This speaks to a serious issue that management can’t figure out how to realistically estimate its sales.
Similarly, management guided a positive $70 million-$80 million in cash flow from operations, but the actual figure came in far short of that.
FireEye’s Problems Are Firm-Specific: FireEye would like to blame the shortfall on general cybersecurity spending weakness. But this excuse doesn’t fly. IDC noted that FireEye’s competitive position within the STAP market is weakening in notably. In 2015, for example, FireEye’s market share in that area fell by more than 5% as competitors including Palo Alto Networks Inc (NYSE:PANW) invaded the space.
Look at competitor Proofpoint Inc (NASDAQ:PFPT), whose stock gained some 60% in about a year through today. Proofpoint makes its profits selling advanced threat protection that protects cloud email and office applications, linking directly into Office 365, Azure, and other such platforms.
FireEye has similar technological capability, but hasn’t marketed as a cloud-integrated service in the same way. While the cybersecurity market has shown some weakness, FEYE has performed uniquely badly.
FEYE Stock Pros
Possible Takeover: FireEye is open to selling itself. That’s generally good news for shareholders. In fact, the company attempted to sell itself in 2016. Bloomberg reported that the company fielded multiple offers. However, the company chose to remain independent, since none of the offers reached the $30 per share level that FEYE had been hoping to receive.
Symantec Corporation (NASDAQ:SYMC) bid for FireEye. However, rebuffed due to an inadequate bid, Symantec instead purchased Blue Coat Systems.
Symantec is a leading player, and a credible buyer. It’s certainly good news that FireEye attracted Symantec’s attention. But that’s not entirely positive for FEYE stock. The company tried to sell itself but didn’t get bids to meet management’s expectations. That tends to put a ceiling — albeit one that’s still well above today’s valuation — on FireEye going forward.
Great Debt Deal: As noted above, FireEye took on debt fairly recently. For a young tech company, you’d generally prefer to see no debt. However, if you need to take on debt, do it how FireEye did. They issued convertible debt that doesn’t mature until 2035. That’s an eternity for a tech company; there are no near-term repayments to worry about.
The interest rate they borrowed at is even more incredible, clocking in at under 2%. For an unproven company, that’s a fantastic rate. The downside is that the debt is convertible. This means the debtowners can turn the debt into common stock should they want to. However, FireEye wisely issued this debt while FEYE stock was grossly inflated. Thus, the conversion price where the debt can turn to common stock is way up at $61 per share. Needless to say, nobody will be complaining about dilution if FEYE manages to rebound to $61 from current prices.
Management may not have proven it can make a profit, but they sure did well with that debt deal.
Election Hacking Concerns: A decent number of observers say foreign hackers helped tip the U.S. election to Donald Trump. Regardless of whether this story is ultimately true, the sheer possibility of Russian hacking should promote more cybersecurity spending.
FireEye managed to get public attention with the hacking issue. Company chairman David DeWalt said the following in an interview:
“The dawning of Russia as a cyber power is at a whole other level than it ever was before […] We’ve seen what I believe is the most historical event maybe in American democracy history in terms of the Russian campaign.”
It remains to be seen if DeWalt can turn that attention into more hard contracts. But public concern is certainly there; the opportunity to take advantage of the political climate is open.
There is a case for FEYE stock here, based mostly on how badly shares have gotten hit. If you are really bullish on cybersecurity, you can make the case that even FireEye, with its recent underperformance, is due for a recovery.
However, there are plenty of concerning signs. And earnings did nothing to alleviate the more troubling signs.
I see little to suggest this is the time to take a flier on FEYE stock rather than sticking with a stronger peer.
As of this writing, Ian Bezek did not hold a position in any of the aforementioned securities. You can reach him on Twitter at @irbezek.