There’s an excellent chance that FireEye (NASDAQ:FEYE) will, like multiple other IT security business in recent years, be taken over at a premium valuation. And if the company is not acquired, FEYE stock looks like a good name to own for long-term investors.]
In October, Business Insider reported that FireEye had hired Goldman Sachs (NYSE:GS) to help it seek to sell itself. Based on my 13 years of closely following the market, I believe that reports by reputable news outlets like Business Insider are usually accurate. Further, when companies hire a financial adviser to explore a sale, many more times than not, they do wind up being acquired.
In recent years, there have been several billion-dollar acquisitions of cybersecurity companies, showing that such firms tend to have characteristics that make them attractive takeover targets.
For example, in 2019 Broadcom (NASDAQ:BRCM) bought Symantec’s enterprise security unit, in 2018 BlackBerry (NYSE:BB) acquired privately-held Cylance, in 2020 Accenture (NYSE:ACN) said it would buy Symantec’s cybersecurity unit from Broadcom, and, also this year, Rockwall Automation agreed to buy Israeli cybersecurity company Avent Data Security.
There are a few reasons why cybersecurity companies are attractive takeover targets. Almost every business needs cybersecurity, and that’s not going to change for the foreseeable future. Since cybersecurity threats are always evolving and the loss of data to hackers can be so catastrophic, businesses have virtually no choice but to renew their cybersecurity subscriptions each and every year. Finally, by acquiring these cybersecurity firms, companies gain many new customers to whom they can pitch their main products.
Cisco Is a Viable Suitor for FireEye
FireEye stock has rallied recently after Spanish digital newspaper Okdiario reported that Cisco (NASDAQ:CSCO) was in talks to buy the IT security company.
Although I’ve never heard of Okdiario before, it was reportedly founded in 2015 and has 50-200 employees, so it doesn’t sound like a fly-by-night media outlet. Moreover, Cisco would be a logical acquirer of FireEye. After all, Cisco already has a cybersecurity business, it had $10 billion of net cash as of December, and it’s struggling to grow (its revenue fell 3,5% year-over-year last quarter).
FireEye Is Still Worth It
FireEye’s management team has sought to focus the company less on its old-fashioned, less profitable security devices and more on its higher-margin, cutting-edge cloud security and consulting businesses.
The company’s fourth-quarter results showed that its strategy is bearing fruit. Specifically, its revenue jumped 8% YOY to a record $235 million, while its cash flow from operations rose to $40 million from $31 million during the same period a year earlier. Further, in all of 2019, its revenue jumped 7% to $889 million, and its cash flow from operating activities surged to $68 million from $17 million in 2018.
FireEye’s billing rose just 3% YOY in Q4 and came in below its previous guidance. But the company explained that the miss was caused by a decline in the average length of the deals it had signed.
FireEye added that the same issue had negatively affected its Q1 guidance which came in below analysts’ average outlook. However, the company’s Mandiant consulting service, which I’ve long been bullish on, is showing signs of breaking out; specifically, in Q4, the unit’s revenue jumped 29% YOY and its billings jumped 32%YOY.
The Bottom Line on FEYE Stock
I think there’s about a 70% chance that FireEye will be acquired, causing its shares to jump around 50% above its current levels.
If the company is not acquired by mid-year or if it definitively dispels the takeover rumors, the shares will likely drop 10%-20%. But over the longer term, the company’s improvement will probably drive FEYE stock meaningfully higher.
As of this writing, Larry Ramer did not own shares of any of the aforementioned companies. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
