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BofA Thinks FireEye, Inc. (FEYE) Stock Has 70% Upside. Here’s Why.

FEYE stock can still make investors some coin, but the key is patience

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FireEye, Inc. (NASDAQ:FEYE) is flying high Monday morning on an upgrade from Bank of America/Merrill Lynch. FEYE stock got a 6%-plus pop as BofA shares a “Buy” rating and an $18 price target — a whopping 70% better than Friday’s close.

It’s hard to be inspired right now. Bearishness has been rightfully high because valuations — relative to future growth — are unfavorable. Management shuffling and a light forecast from FEYE also suggests that FireEye will have limited upside for investors in the near-term.

But BofA sees what I see — that in the long-term, FEYE stock could pan out.

The Fundamentals

Last month, FireEye reported flat (year-over-year) fourth-quarter revenue growth of $184.7 million. Operating margins improved to -1%. The company forecast Q1 revenue of as low as $160 million, while analysts expected FEYE would generate $177 million in revenue.

The company clearly is in a turnaround phase, but until the sales team transition stabilizes, short-term pains in FEYE stock will continue.

Last quarter, FireEye revenues suffered due to the limited release of new products. Its sales team had vacancies that needed filling, leaving a massive gap in leadership. But the company had no head of sales for the worldwide or Europe divisions. The company’s Middle East and Japan units underwent sales management transitions, too.

The impact on results is very clear: FireEye did not meet analyst expectations.

Investors may anticipate sales improving sometime in the next few quarters, depending on the productivity of the new sales team. Fixing the internal sales process will result in better profitability. On its conference call, FEYE management said:

We are also working across the board to minimize the number of deals that go through our non-standard pricing process, or NSP process, so partners can control their margin and shorten their sales cycle.

FEYE has a believable plan to turn around and restructure its sales division. The problem is simply one of timing.

FireEye Valuation

With the stock price hovering near yearly lows, some, if not all, of the risks of a failed turnaround are priced into FireEye shares.

By assuming a discount rate of between 11.5%-12.5%, FEYE stock is worth 12.5% more than current levels. Conversely, if revenue continues falling, the fair value based on future cash flow implies a lower share price. BofA doesn’t see that as happening, though.

“We think the Street largely ignores management’s guidance for growth resumption in 2H17, which is an opportunity for a positive surprise,” says analyst Tal Liani.

There’s headline support here, too. The demand levels for cybersecurity solutions is unpredictable. Whenever the public hears about a security breach, though, the news drives the stock price up. Markets anticipate that companies addressing security holes will buy solutions from FEYE.

Bank of America seems to back that up, saying that FireEye’s threat intelligence is the most advanced offering out there. From the note:

“FireEye’s core value proposition is centered around having some of the most advanced threat intelligence that lends its value to three areas of innovation: dealing with network threats, strong position in endpoint protection and above all is the value of analytics and threat management.”

Product Development

FireEye’s public, hybrid and private cloud security solutions are among the bricks upon which FEYE stock could be built back up.

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