The past year hasn't been kind to FireEye (MNDT) and its shareholders. The cybersecurity specialist's sales growth has slumped, and persistent losses have investors wondering when -- or if -- it will turn its first real profit. The stock is down by almost two-thirds in the last 12 months.
So today I'm highlight two promising companies that are posting stronger operating trends and as a result have enjoyed soaring stock prices. Investors interested in head-turning growth should take a closer look at NVIDIA (NVDA -1.51%) and Netgear (NTGR 0.42%).
There are good reasons why graphics processing giant NVIDIA has seen its stock price nearly triple in the last year. Sales are surging in its core gaming market, for one, thanks to its hit line of Pascal-powered graphics cards. Yet investors are just as excited about the many emerging industries that NVIDIA is well-positioned to serve. These include areas like artificial intelligence, deep learning, and driverless cars that could all see massive growth over the next decade. But investors don't have to wait that long. Accelerating gains in each of these areas contributed to record results for NVIDIA last quarter.
Contrast that broad growth with that of FireEye, whose security platform is highly dependent on rising IT budgets. The company has to convince tech managers to make room for its virtual-machine-based security platform that's above and beyond the resources that they already allocate toward traditional security measures like firewalls, gateways, and antivirus solutions.
That can be a tough sell, especially as larger rivals muscle in on the space by offering comparable software at potentially lower prices. FireEye's product division, in fact, has shrunk over the last six months. While that decline is partly due to the fact that customers are moving toward subscription-based purchases, it still points to stubbornly low growth rates.
Netgear, which sells a broad range of networking devices, has had an especially strong year on the stock market (up 98% in 12 months). That's partly because sales growth is picking up, with last quarter's 8% boost marking a big improvement over the prior quarter's flat result. Yet the bigger story is about Netgear's surging profits.
Gross margin has jumped to 32% of sales over the last six months from 28% in the prior-year period. At the same time, the company has held the line on expenses so that its operating margin nearly doubled to 8.2% of sales. These wins have translated into net income that, at $33 million, is roughly three times the prior year's result.
The good news for the business is that Netgear hasn't had to sacrifice spending on priorities like research and development or marketing to achieve that earnings growth. FireEye, on the other hand, has had to scale back on all of its expense categories. This has helped reduce the pace of operating losses, but the company is still losing nearly $600 million a year.
Investors are well aware of the brightening prospects for both Netgear and NVIDIA, and so they have pushed valuations to new highs to account for the positive trends. For a piece of NVIDIA's business, you'll have to pay 27 times expected earnings, starkly higher than a forward P/E of 12 the company had at one point this year. Likewise, Netgear's valuation is sitting at a pricey 20 times projected profits, up from a recent low of around 13.
It's possible that FireEye could enjoy a similarly sharp jump over the next year, especially given all of the pessimism that's reflected in the stock price right now. However, key weaknesses in its operating and financial results suggest that investors might be better off directing their cash toward candidates like Netgear and NVIDIA -- at least until FireEye can show more robust sales growth and a clearer path to profitability.