FireEye Traded Higher After Lock-Up, So Now What?

FireEye shares might have surprised to the upside following its lockup expiration, but does this mean investors should buy now?

May 24, 2014 at 9:00AM

FireEye's (NASDAQ:FEYE) enormous lock-up expiration threat turned out to be a surprising blessing in surprise, as the stock accumulated gains of 11% on the day of its expiration, combined with the two days prior. Clearly, FireEye shares followed Facebook's (NASDAQ:FB) lead and, most recently, Zulily (NASDAQ:ZU), as insiders and institutions saw more value in holding shares. Nonetheless, investors should now ponder what happens next?

An unlikely expiration reaction
On Wednesday, 68% of FireEye's total shares outstanding became eligible for sale, per its lock-up expiration, which gives insiders and some institutions their first opportunity to cash out. It seemed likely that shares would fall, especially given the company's 21 times sales valuation multiple. Instead, shares rose more than 2% on nearly triple the stock's normal daily volume.

Essentially, FireEye's unexpected reaction follows a trend witnessed among some momentum stocks. Most recently, Zulily soared by double-digits on May 14, when almost 90% of its shares outstanding were available for sale. Given its near-40% stock loss in the prior month, investors assumed it would fall, although it didn't. Furthermore, Facebook was the first lock-up expiration surprise, as it rose 13% from near all-time lows in 2012, when 40% of its shares were able to be sold.

Notably, each of these three stocks was trading at losses of more than 50% from 52-week highs at the time of its lock-up expiration, which might have, consequently, influenced insiders and institutional investors not to sell shares. Nonetheless, each was equally surprising.

Should you now buy FireEye?
FireEye's feared lock-up expiration is now a thing of the past, which naturally sparks the question of whether now is time to buy both FireEye and Zulily.

Looking back at Facebook in 2012, following its expiration, the company's stock price was barely above $23 (seven months later). It wasn't until July 2013 that Facebook shares soared beyond the mid-$20s and north of $30, where they have since remained. The catalyst: Facebook announced second-quarter earnings, where revenue growth accelerated to more than 60%, up from a prior mid-30% growth rate, as mobile advertising sales finally saw some acceleration.

Fundamentals are what set Facebook's stock free, not the lockup expiration. Investors must keep in mind that, for FireEye and Zulily, the expiration has passed without an enormous stock slide, but the ability to sell shares still exists, meaning there are now more potential sellers than buyers. Thus, while investors can look to FireEye's stock chart to see declines from nearly $100 to $31, they must also remember the company trades at more than 20 times sales and spends nearly $1.20 in operating costs for every $1 of revenue it earns. Hence, FireEye is not cheap, by any means.

Final thoughts
With all things considered, it's unlikely that FireEye will see a return to enormous stock gains behind the lockup expiration. The stock may see a temporary boost, but long-term, the company remains expensive with too many questions surrounding margins and increased competition from big tech.

However, for long-term investors, Zulily -- at 5.5 times sales with consistent profits -- looks attractive. Like FireEye, the expiration alone will not slingshot it to new highs, but as fundamental growth persists and questions of spending become less relevant, it becomes a good company whose stock will eventually follow its fundamental performance.

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Brian Nichols owns shares of ZULILY, INC. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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