Is FireEye Inc (NASDAQ:FEYE) really on the verge of a turnaround? The FEYE stock chart certainly says so. After peaking near $55 a share in mid-2015 and then sliding back to a low of less than $11 in mid-March, FireEye has since gained 42%. That’s tops among all the major cybersecurity stocks for the three-month stretch, which includes formidable competitors like Palo Alto Networks Inc (NYSE:PANW) and Check Point Software Technologies Ltd. (NASDAQ:CHKP).
The question is, can FEYE stock continue to move forward at its current pace? Perhaps the more important question right now is, can FireEye shares do so without peeling back first?
That’s the conundrum for anyone still on the sidelines, surprised to see this stock perk up so much, so quickly.
There’s shortage of opinions about FireEye, the stock or the company (which aren’t necessarily one and the same). As our very own Richard Saintvilus pointed out on Wednesday, cybersecurity spending is expected to swell to more than $100 billion over the next three years, and the Milpitas, Calif. company is well positioned to capture its share of that growth.
On the flipside, Tom Taulli was right when he explained the previous day that turnarounds can take a long time to materialize, and FireEye is facing some tough rivals in the aforementioned Check Point and Palo Alto Networks.
Both writers make valid points, underscoring the headache FEYE stock is causing most investors right now. Weighing all the pros and cons, though, the scales tip in a broadly bullish direction.
Still, that’s not a decision free of caveats though.
It’s All About the Trajectory
Just to frame the discussion correctly, FireEye isn’t an investment, at least not yet. It’s a trade, morphing into an investment. FEYE does have the most important ingredient in the investment mix: Trailing and projected results indicate it’s (finally) on a positive trajectory.
The chart below tells the tale. Revenue growth (shown in blue columns) is slowing down as the company has pared back its aggressive acquisition spree. But, late last year, FireEye moved into the black.
That was a swing to an operating profit, to be clear. On a GAAP basis, the organization has been and will continue to lose money at least through 2019. That’s okay, though. CEO Kevin Mandia has proven the new business model works. Now he just needs to enhance the numbers. Investors are less concerned about the lack of actual profits, however, as they’re impressed by the progress.
The ‘New’ Model
And what is the new model that drives less growth but more profits? Last year, Mandia directed the company to focus less on sales of products — which only occur once — and sell more subscription-based services that generate consistent revenue month in and month out.
That shift isn’t exactly news to most anyone who’s kept close tabs in FEYE stock and the underlying story. Recurring revenue is a heck of a lot less complicated (and less costly) to produce than revenue generated by one-off products. That’s not the only upside of maintaining a software-as-a-service platform though.
To be sure, the need for cybersecurity isn’t ever going away. Historically, enterprises might go back to a previous supplier when it’s time to upgrade its digital defense. Loyalty in the business is minimal though, and it’s just as easy for one of FireEye’s previous customers to choose a competitor when it comes time to update their digital defense systems.
Not so with a platform. When providing access to a platform, the provider can easily update that service, and add new features to the menu with just a few keystrokes. With upgrades and updates at a user’s fingertips versus the hassle of implementing an entirely new system, it’s easy for FireEye to remain an organization’s preferred cybersecurity provider.
Bottom Line for FEYE Stock
Don’t misread the idea. As underestimated as FireEye’s new model may be, it will be years before it actually bears enough fruit to pay all of the company’s bills. FEYE stock will surely rise and fall between now and then. Indeed, one of those moves may materialize quite soon, as shares have left behind three gaps since March’s reversal; traders don’t like to leave gaps unfilled.
If you can stomach the volatility though — and remain well aware that FireEye is still only a trade that is morphing into an investment — you can afford to lean bullishly.
Just pick and choose your battles carefully.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.