FireEye: A Stock To Keep Your Eye On

| About: FireEye, Inc. (FEYE)

Summary

Being a leader in a solution to a growing problem leaves it with huge upside potential.

Unhealthy past finances are taking a turn toward sustainability.

Negative earnings have caused investors to oversell.

It has been a hard year for owners of FireEye's (NASDAQ:FEYE) stock. Despite the faith of its bulls, the company is having serious trouble turning a profit. Quarter after quarter it continues to lose more and more money. Yet, when a company constantly loses money, we must look at why, in order to get the bigger picture. A quick look at its 10-K can show us quite a bit. It is spending an absurd amount of money for the sake of growth. Its gross margins are quite solid: 62.6%. Yet, despite its solid $390 million of gross profit in 2015, it spent $476 million on sales and marketing and $280 million on R&D.

It is always hard as an investor to invest in companies that ignores the short term in order to focus on growth. Nobody likes to invest in a company that has negative earnings… especially when they don't seem to be getting better. Yet, this is exactly the reason to invest right now. These consistent losses have hammered the stock price. All investors who were hoping for a quick turnaround have given up and have sent the stock price tumbling, leaving an opportunity for those with some patience. After being down 56% since this time last year, this should-be growth stock now has some serious value as well.

Fire Eye Chart.png

Luckily, while all these consistent losses have been factored into its low stock price, it seems as though its potential is being ignored. With some simple movement and restructuring, the business could be made profitable in a snap. All this spending has been for the sake of growth so when it is happy with its position, it has the capacity to lower its expenses significantly and realize profits.

However, the reason to invest in this company, while supported by financials, is its position within a growing industry. As a leader in the cyber defense industry, it is in position to not only grow but become essential to the general marketplace. 2015 saw a drastic increase in cyber-crime and the numbers are only growing faster. While business after business gets ransomed for more and more money, cyber defense will no longer be a luxury but a necessity. This comes on the backs of increasing numbers in all forms of cyber attacks.

In 2014, 348 million identities were exposed. In 2015, however, that number grew an astonishing 23% to 429 million. The cost of these security breaches has put a huge burden on victim companies. Unfortunately, this increase isn't high when compared to the increase in other forms of theft and attacks.

As the industry grows, so will FireEye's place within it. Currently, one of the fastest growing forms of cyber-crime is called a zero-day exploit. This is when an attack focuses on a hole in the victim's system and exploits it before the company notices. According to a report by Symantec, from 2014 to 2015, the number of zero-day exploits increased 125%. This alarming number is said to continue year over year and defense will become just another expense every company has to pay. This is cheap when compared to the cost of paying the ransom hackers charge for the stolen information. Luckily for FireEye, as a leader in Zero-Day Exploit defense, this gives it a huge upside potential for growth.

We have already seen FireEye realize some of this growth potential. From 2014 to 2015, it saw its revenue grow from $426 million to $623 million, an increase of 47%. It is clear that it sees now as its best time to grow. Despite earning $623 million in revenue, it spent $577 million on investing activities. This is showing that it believes the money spent now on growth, while causing a short-term deficit, will pay off long term. While this in the past has caused serious cash flow issues for it, it seems to be fixing that problem quickly. Instead of a negative net change in cash like 2014, it actually has a net gain in cash of $256 million in 2015. When added to the fact that its FCF (free cash flow) deficit in 2014 was nearly $200 million and despite increasing its investing activities, it reduced that deficit to $20 million in 2015, we see that the company's finances are heading in a much healthier direction.

Despite all the worries net losses bring any investor, I would rate FireEye a buy. Based upon its place within a growing industry and its movement to a healthier financial position, I think that the market has oversold its stock and left an opportunity for the less "news-oriented" and more fundamentalist investor. Therefore, I think that while it might take a while for FireEye to return to its previous stock price, it could reach there in the next year to 18 months.

Conclusion:

  • Negative earnings has made investors oversell.
  • Financials are looking healthier quarter by quarter.
  • Maintain a good position in a blossoming industry.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.