Fireye shares have been under stress recently, due to unflattering earnings and revenues reports. The stock is down about $18.00 earlier this year, now trading around $14.50. With cybersecurity now becoming more of a concern among firms around the world, there could be better days ahead for Fireye.
With the sale of a competitor, Barracuda Networks, to private equity firm Thoma Bravo, LLC. for $1.6 billion, or $27.55 per share, we saw an opportunity to make an acquisition comparison. Barracuda and Fireye share many similarities, both in products/services offered, and in their financials. Barracuda reported Q2’18 revenues of $94m, at which the company was bought at a multiple of about 17 times those reported revenues. The acquisition price was announced at a 22.5% premium to the stock’s 10-day average price prior to Nov. 27, 2017.
Barracuda’s Gross Profit Margin is currently just over 73%, and Fireye provided guidance for the current quarter of margins from 73%-75%. We don’t see margins climbing any higher than that in the near-term future, in comparison to industry averages.
Both of those figures represent the current fiscal quarter. What we found most interesting is that if we apply a revenues multiple comparison to the two companies, Fireye is greatly undervalued right now, relative to Barracuda. If we applied a 17 times revenue multiple to Fireye’s price, which is what Barracuda was acquired at, we come to a stock price of $67.55. That does seem quite high compared to the current trading price of $14.50, so a multiple of a conservative 5-7 yields a more reasonable price of $20-$28. The stock currently trades at a multiple of 3.5.
But rather than valuing Fireye with current figures, let’s look into next year’s expectations. We expect Fireye to produce modest revenue growth of about 2% in the next quarter, to TTM revenues of about $754.8m. Given that prediction, we apply a revenue multiple of 4, and that leaves us with a target price of around $20.00. As mentioned above, the current revenue multiple is right around 3.5 times. We feel this multiple can increase to 5-6 times in the next year.
The last valuation metric we want to touch on is the common EV/Revenue ratio. We have calculated Fireye’s current Enterprise Value at $2.479 billion, nearly twice as large as Barracuda’s. Barracuda’s current Enterprise Value is $1.268 billion. Let us use current revenues rather than future predicted revenues to find these EV/Revenue ratios. Barracuda’s EV/Revenue is 3.46, while Fireye’s is 3.35. We would like to apply an EV/Revenue multiple of 4.83, which we feel is achievable in the next year, as an industry benchmark. Given this, we see exceptional growth opportunities for Fireye. If we were to apply this multiple to Fireye right now, we would see a share price of $20.50, and could even go as high as $25.00 later next year.
Given uncertainties in the realm of politics (GOP tax bill), geopolitical risks, security valuations, and some uncertainties as to Fireye’s performance outllok, we are taking a conservative, but bullish stance on Fireye. Within the next six months, we have a price target on Fireye in the range of $17.00-$21.00, assuming revenue growth keeps up and markets stay optimistic.
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