FireEye Inc (NASDAQ:FEYE) stock is sharply lower today ahead of its second-quarter earnings report, due out Tuesday afternoon. Late Sunday evening, both professional and personal records of a Mandiant analyst were leaked online. The leaked records were accompanied by a warning that a much larger data breach was possible.
Why is that a big deal for FEYE stock? 1) FireEye owns Mandiant. 2) FireEye does cybersecurity. A cybersecurity company getting hacked is the sort of news that cripples a company’s ability to acquire customers.
Accordingly, FEYE stock is down almost 4% as of this writing. If you’re wondering if this makes FireEye a buy at a discount ahead of its Q2 earnings report, stop wondering — it’s not.
Secular Tailwinds Aren’t Enough for FireEye
The market has been bidding up cybersecurity stocks on the back of some pretty big secular tailwinds. First, there was the WannaCry attack in May. Then there was the Petya ransomware attack in late June. Now companies are starting to report the financial repercussions of that attack, and they aren’t small. Moreover, experts think that we are just beginning an era of “cyber insecurity.”
That is why FEYE stock, along with many of its peers, has rallied strongly this year. FEYE stock is up 22% year-to-date. But the more recent trend in these red-hot cybersecurity stocks is much more bearish for FEYE stock.
Second-quarter cybersecurity earnings have disappointed across the board. The broad theme seems to be robust revenue growth in the second quarter, weak revenue growth expected in the third quarter due to international market weakness and margin compression as a result of competitive pressures.
The combination of these headwinds has caused all major cybersecurity stocks to sell off following their most recent earnings reports.
Bad News Bears in CyberSecurity Q2 Earnings
Check Point Software Technologies Ltd. (NASDAQ:CHKP) reported blowout Q2 results recently. Both revenues and earnings topped analyst expectations, but soft Q3 guidance sent CHKP stock sharply lower after the earnings report. The cybersecurity giant blamed the soft forward guidance on the Israeli holiday Yom Kippur, which would cause a pause in business activities. Despite the weak Q3 guide, though, Check Point Software maintained its full-year revenue outlook. But investors didn’t seem to care, and CHKP stock dropped.
Barracuda Networks Inc (NYSE:CUDA) also reported robust revenue growth in its earnings results. Margins, however, were an issue. The company’s gross margins compressed due to an adverse shift in product mix. Meanwhile, the operating expense rate grew due to cloud investments. The mixed margin narrative concerned investors, who had bid up the stock into the report. Consequently, CUDA stock also dropped after its most recent earnings report.
F5 Networks, Inc. (NASDAQ:FFIV) didn’t even benefit from the secular tailwinds in the quarter as revenues came in short of expectations. The culprit? A slowdown in international markets. Growth in Europe, Middle East, Africa and Japan all came in below expectations. The revenue guide was also weak, as this slowdown is expected to continue. To make matters worse, there was also some margin compression in the quarter, corroborating the competitive pressures CUDA eluded to. Like CHKP and CUDA, FFIV stock also dropped after its most earnings report.
At Fortinet Inc (NASDAQ:FTNT), the revenue growth and margin growth narratives both remain on track. Revenues came in above expectations, as did earnings thanks to solid margin expansion in the quarter. But management gave a light third-quarter guide. Why? Europe. Yet again, we see that there is a pause in cybersecurity spending in international markets. This weak Q3 guide sent shares of FTNT lower after its most recent earnings report.
So, in sum, CHKP stock, CUDA stock, FFIV sock and FTNT stock all dropped after their most recent earnings report.
Why would FireEye buck the trend? It won’t. Indeed, considering today’s alleged hacking, FEYE might actually give the weakest guide of them all and that could be horrible for FEYE stock.
Bottom Line on FEYE Stock
Cybersecurity stocks have overshot themselves here. While the group represents a multi-year secular growth story, there is some choppiness in the sector right now due to international weakness and competitive pricing pressures.
FireEye is not exempt from these headwinds. FEYE stock, like its peers, will sell off after its second-quarter earnings report.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.