Last week, the S&P 500 had its best week of the year, but cybersecurity stock FireEye (FEYE) did even better. Shares of FEYE rallied 5% over the last five days, thanks in part to a promising report from International Data Corp.
The report showed that FireEye boasts just under 40% of the $930 million “specialized threat analysis and protection market” — a slice of the pie seven times larger than its closest competitor.
That’s the good news. The bad news is that, despite last week’s jump, FEYE stock is still sitting more than 25% in the red year to date vs. the broader market’s 2% gains.
But, that’s only bad news from one perspective. If you ask me, the recent downfall for FireEye stock represents a great opportunity to buy a long-term winner at a reasonable price.
Lowered Expectations Sent Shareholders Running
Recently, investors didn’t just sell FireEye stock, but sprinted for their lives toward the exits. In early November, the company missed billing expectations and lowered revenue expectations for the year, sparking a one-day 23% sell-off and dragging other big names in the sector down with it.
The CEO blamed “a friendlier China” for the miss, as The Wall Street Journal reported. The Journal added:
“The two-pronged guidance highlights a conundrum of the cybersecurity business. To grow sales, Mr. DeWalt has to say he can stop the hackers. But for sales to keep growing, the hackers can’t actually stop.”
While this conundrum exists, the reality is that the cybersecurity industry is too young for the trend in hacks to actually reverse. The disappointment with regard to FireEye comes in part because of just how quickly the relevance of cybersecurity became apparent in a series of high-profile acts. And, this recent lull comes relative to this new normal of headline-worthy security breaches.
While this may seem pessimistic, it’s positive for investors in cybersecurity stocks and is one of the reason’s I’ve been so bullish on the industry. A sound investing strategy is to find an expanding industry such as cybersecurity — which is a completely brand new space since the Great Recession — and then find leading stocks in the sector.
Last week’s IDC report confirms that FireEye is indeed a leader, which is precisely why the market began to feel a bit more optimistic about FEYE stock.
But, it’s not just one report that makes FEYE worth your consideration. Despite the billings disappointment, FireEye has a strong history of earnings beats. While the company is not yet profitable, its losses are consistently narrower than analysts expect. Not only is the general trend for the losses to continue shrinking long-term, but analysts continue to revise just how quickly they will shrink.
Bottom Line on FireEye Stock
In the last three months, analysts have narrowed the expected loss by 9 cents for 2015 and 11 cents for 2016.
Meanwhile, the overall trend for revenue growth remains strong. Even with lowered expectations, the consensus is for 47% sales growth this year, with another 30% on deck for 2016.
That kind of growth proves FEYE has a big-time mega-trend at its back, and that billings blips are inevitable, cyclical, and no reason to worry.
It’s no wonder the highest analyst target is more than double FireEye stock’s current price, even after last week’s gains. Even a little more conservative calculation using the median price target leaves room for 30% upside.
Get in now so you can enjoy the ride.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
