Why FireEye Is A Sell

| About: FireEye, Inc. (FEYE)

Summary

FEYE’s billings growth has also slowed down remarkably of late, which is bad news for investors as it is hurting the financial performance and forced a lower guidance.

FEYE cites reduced Cybersecurity spending as the reason behind its weakness, but the problem seems to be company specific considering the performance of peers.

FEYE’s revenue growth has been slowing down over the past few quarters and it underperformed last quarter as compared to its guidance, while peers have been doing better.

FEYE has been losing market share due to the widespread availability of competing sandboxing solutions from the other cyber security firms, raising another red flag.

FireEye (NASDAQ:FEYE) has had a difficult time on the market this year, driven by slowing growth and a perception that cyber-security spending has taken a hit. In fact, the stock is down close to 30% in 2016, and I believe that there is more downside to be had going forward, especially after considering the company's trend of slowing growth.

In fact, the problems suffered by FireEye seem to be specific to the company itself. It is now a victim of growing competition and is probably finding it difficult to survive in the industry. In this article, we will take a closer look at the red flags that FireEye presents and why investors should be avoiding it.

FireEye's growth will continue to slow down

FireEye has lowered its revenue and earnings estimates three times this year, which suggests that the company is finding it impossible to maintain its revenue and earnings growth. For example, FireEye now expects its revenue for the year to come in the range of $716 million to $728 million, down significantly from its earlier guidance range of $780 million-$810 million at the end of the first quarter of 2016. In fact, its revenue is down approximately 12% from its guidance given at the start of the year.

The worst part is that despite making sustainable progress on the cost structure, FireEye expects a higher net loss per share for the year. As per its recent guidance, its net loss is projected to come in a range of $1.28 to $1.32 per share as compared to a net loss of $1.20 to $1.27 per share, projected at the end of the first quarter of 2016.

Why hitting the current guidance might be a stretch

In my view, the company may not be able to achieve even this guidance due to slowing billing growth, reduced cyber security spending, and rising competition across the industry. According to CRN, tech companies such as Palo Alto Networks and Cisco recently rolled-out threat-prevention solutions that directly compete with FireEye's solutions. In fact, driven by increased competition and new players in the industry, FireEye lost more than 5.2% of its market share in 2015 due to the widespread availability of competing sandboxing solutions from the other cyber security firms. Given that other firms are growing at a faster rate than FireEye, I expect it to continue losing market share going forward.

More importantly, FireEye is already seeing much slower growth for its billing orders, which is another big red flag for investors. For instance, its billing growth rate has come down to 10% on a year-over-year basis from 22% in the first quarter of 2016 and down significantly from 56% growth in the second quarter of 2015.

Billings Growth on a Year-over-Year Basis in Million

Metrics

Q1, 2015

Q2, 2015

Q3, 2015

Q4, 2015

Q1, 2016

Q2, 2015

Billings

152

178

211

257

186

196

YOY Change

54%

56%

28%

215%

22%

10%

Click to enlarge

Source: FireEye

Therefore, the continued decline in the revenue and billing orders growth rate, coupled with increased competition across the industry, FireEye will find it quite difficult to maintain its market share going forward.

Why FireEye will slowdown further

Given that FireEye is a growth stock and loses money every quarter, the only factor sustaining its ridiculously high valuation was its growth. High-growth tech stocks tend to crash when their growth underwhelms the market and this is exactly what happened with FireEye.

For instance, although FireEye's revenue last quarter increased to $175 million from $147.2 million in the second quarter of 2015, the growth rate has slowed down significantly. Its growth rate has come down to 19% in the last reported quarter from 34% in the first quarter of 2016, on a year-over-year basis.

In fact, the quarter was so bad that its revenue for the quarter came in below its own guidance range of $178 million to $185 million and lagged behind analysts' expectation of $181.67 million by a wide margin. The following table illustrates the slowdown in revenue growth on a year-over-year basis in recent quarters.

Revenue Growth on Year-over-Year basis

Metric

Q1, 2015

Q2, 2015

Q3, 2015

Q4, 2015

Q1, 2016

Q2, 2016

Revenue

125.4

147.2

165.6

184.8

168

175

YOY Change

69%

56%

45%

29%

34%

19%

QOQ Change

17%

13%

12%

-9%

4%

Click to enlarge

Source: FireEye

Bulls have even touted FireEye as a strong acquisition candidate for companies like Cisco (NASDAQ:CSCO), however the slowdown in revenue growth has likely poured cold water over the acquisition rumors. Citing the slowdown in sales, major hedge funds such as Israel Englander (Millennium Management) and Ken Griffin (Citadel) have sold around 1.4 million shares from the start of this year till the end of March. Clearly, even big investors have become skeptical of a FireEye buyout as the company's growth has started to underwhelm.

On the other hand, major cyber security players such as Check Point, Imperva, Proofpoint, Palo Alto, and Fortinet have reported healthy results across their operations. In fact, these companies have provided substantial growth in the revenue and earnings guidance for the year, unlike FireEye. It is evident that the growth issues at FireEye are more company specific rather than market specific.

FireEye has probably lost its growth path after the departure of its ex-CEO Dave DeWalt. Moreover, DeWalt was a well-renowned company salesman and his departure killed any hopes of a FireEye acquisition. While it is too soon to judge new CEO Kevin Mandia's performance, but given that FireEye is already laying off employees points to the fact that its days of strong growth are over.

Conclusion

Given the growing concerns about its revenue and billing growth, FireEye doesn't look like a safe investment. The increased competition from its rivals and the entry of new players with compelling solutions will make it tough for FireEye to sustain its market share, as stated above. So, investors should continue to stay away from FireEye as the stock's future looks grim.

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.