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FireEye: No Margin Of Error

Mar. 06, 2018 11:54 AM ETAlphabet Inc. (GOOG)CHKP32 Comments


  • FireEye has vastly improved financial results in the last couple of years.
  • The cybersecurity company still isn't predicting generating large cash flows and profits.
  • The stock won't rally much farther until FireEye shows that the business isn't structurally low margin.

Last year, FireEye (FEYE) became a compelling turnaround story as business under the surface improved from a shift to subscription services while the cost structure was finally aligned with the revenue stream. Unfortunately, the company is still running into some of the legacy cost issues that will hold the cybersecurity specialist's stock back.

Source: FireEye website

Low Margin Targets

The biggest thesis of the last couple of years was the shift from insanely negative margins towards breakeven levels. Changing the out of control spending culture was a fundamental reason that FireEye has bounced to $17.50 now after trading at a 52-week low near $10.

The biggest disappointment with leveraging up the growth story is that 2017 results and 2018 guidance don't support much in the way of gains once reaching breakeven. The below chart shows how the company cut out the -20% operating margins from 2015 and prior, but the margin profile hasn't improved since reaching -1% in Q4'16.

Source: FireEye Q4'17 presentation

The guidance for 2018 continues this trend. The company only forecasts a 100 to 200 basis point improvement for the year, placing EPS and free cash flow targets at only breakeven levels.

Source: FireEye Q4'17 presentation

FireEye is clearly losing steam in improving the financials and highlights the prime problem starting with margins so far in the hole. Getting to breakeven just isn't good enough. FireEye is projecting revenues and billings in the $800 million range which is a very sizable organization in the cybersecurity space.

Conversely, an old cybersecurity stock like Check Point Software Technologies (CHKP) trades at double the sales multiple of FireEye on lower growth due to the massive cash flows generated. For 2017, Check Point delivered cash flows from operations of almost $1.1 billion for nearly 60% of sales.

This article was written by

Stone Fox Capital profile picture

Stone Fox Capital (aka Mark Holder) is a CPA with degrees in Accounting and Finance. He is also Series 65 licensed and has 30 years of investing experience, including 10 years as a portfolio manager.

Mark leads the investing group Out Fox The Street where he shares stock picks and deep research to help readers uncover potential multibaggers while managing portfolio risk via diversification. Features include various model portfolios, stock picks with identifiable catalysts, daily updates, real-time alerts, and access to community chat and direct chat with Mark for questions. Learn more.

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Comments (32)

Stone Fox Capital profile picture
FireEye (NASDAQ:FEYE) shares gain 4.3% after a The Information article says Cisco (CSCO +0.6%) and Symantec (SYMC +0.3%) have looked into buying the company.

These rumors come out when people want to exit a stock so be careful.
esavela profile picture
Bottom line for me based on my own observations and those above who know a lot more than I do, I will stay long on FEYE, good product and potential acquirer.
I agree, I think reading bits and pieces online HP or Cisco is more likely buyer although I personally think Microsoft should buy it
tikigod18 profile picture
CarjoeCXdin----> what makes you say that, other than pure wishful thinking?
Won't discuss all the information I have on a public forum.
I can say.
HPQ has the money and stock.
HPQ is in dire need this type of solution in their security portfolio. They need more subscription-based software with huge growth potential. Plus, HPQ loves acquisitions of companies that corner the market on patents.

They dominate MALWARE detection. Some Patents will be helpful based on future needs.

IBM, CSCO and MSFT have the money but they all are waiting for a 1 billion in sales target to be reached. HPQ not so much.

Lastly, World Largest Security Show happens every year in San Francisco. RSA Conference is April 16-20. Most big news happens around this show's timing.

PS: I would rather Fireye to continue on its own path, and NOT to be acquired. They have some great patents that will ultimately protect Autonomous Vehicles and Robotics Equipment.
Any source reference regarding their patents covering autonomous vehicles and robotics? Thx
fully agree but thought it would be HPE, since this would be a massive addition to its government cybersecurity services making it hands down the most dominant player for US defense/Gov cybersecurity.
Would like to hear the author's reply to the accusations leveled in this article against him. Very disappointed if these turn out to be accurate.

Very damning piece. Good reminder for everyone to read these articles with suspicion and to do your own DD.
Stone Fox Capital profile picture
SA asked me to address the issue via an article so lets keep this discussion to $FEYE.
Qniform profile picture
SFC, I imagine we'll be waiting a long time for that article if you listen to advice from counsel.
esavela profile picture
FEYE will likely be acquired this year. Stay long.
HPQ is looking at FEYE
I own Fire Eye stock for last two years, their forecasts for this year is double digit growth, 10% would be the most negative view and thus that seems to be your view based on your article. Fire Eyes new products including Helix, refresh opportunities, new Resellers, targeting mid-size businesses all points to increased revenue. Mandiant revenue in past quarter is a great pointer to future revenues for products in the rolling 1-2 quarters. Mandiant last quarter had a record quarter which points to knock on product sales over coming quarters.
A nothing article if you ask me. Fireeye expects to get back to double figure growth this year, the signs the last few quarters is just that. I think it will be 15-20%+. If they achieve this and keep their expenses low then there they will be in a healthy profitable company in one of the few high growth sectors in IT. I would not be surprised if they get to 20% growth to see this stock at $40+ this year. What Cisco/IBM/Microsoft would not want their products, Mandiant would ensure whoever buys Fireeye to have an edge, I expect a buyout this year
Stone Fox Capital profile picture
Nothing about the results suggest 20% growth is possible. Why aren't you happy with 10% growth? The problem is the expenses. $FEYE already as the same operating expenses as $CHKP.
Charlie's Munger profile picture
when will fireeye get back to ipo price?
I don't understand this article. Clearly, FEYE has just really started to capitalize its new subscription model and continue with operating cost improvements, while margin growth is also in the cards. They are consistently hitting set goals and as cybersecurity valuations go FEYE is still substantially undervalued on an FTM basis and should again achieve a 30 price per share next 6 to 12 months. That is if they don't get acquired before then, which is very likely.
Stone Fox Capital profile picture
Are you happy for a goal of 1-2% operating margins after reaching -1% in Q4'16?
I recommend to vary your approach to valuing a stock based on its industry comps and technicals. instead of using one approach fits all. I am sure shareholders of PFPT are still singing all the way to the bank.
Stone Fox Capital profile picture
$PFPT is highly profitable. Kinda confirms my thesis on profits.
I looked at the charts, and if you like Elliot wave, it just entering the third wave, which 'seem' to indicate that even in the short term, FEYE is more likely to go up than down.

Other charts also confirm this trend, but these are only charts and may mean nothing. The author has probably dug deep into the fundamentals and would probably know more.
Stone Fox Capital profile picture
the technicals no doubt suggest a potential breakout above the current price. My point is that the company is missing a grand opportunity to ensure it happens my driving operating margins into the 5-10% range before being so satisfied with their progress.

$FEYE acts like that basketball team that battles back from a 20-pt deficit to only let up once they tie the score. The goal is to get and maintain a lead and the company hasn't done that yet.
esavela profile picture
I think many holders here are anticipating a prospective buyer coming along. FEYE's business is crucial to cyber security. You did not mention that probability in the article. Any thoughts?
Stone Fox Capital profile picture
Unpredictable buyouts don't make for a very good investment thesis. Would appear that an acquirer could strip from fat from the operations of $FEYE, but making the deal accretive is tough when the company isn't profitable and has limited growth.
*for ...."No Margin for error"
Charlie's Munger profile picture
Tough industry - want to love it but no wonderful businesses at fair prices
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