Fireeye Hardware

Image source: FireEye.

What happened

Shares of cybersecurity company FireEye (NASDAQ:FEYE) dropped 42.6% in 2016, according to data provided by S&P Global Market Intelligence. The stock began to decline in mid-2015 as revenue growth slowed and quarterly revenue estimates began to be missed. That decline extended into 2016 as the company's results further deteriorated.

So what

During the third quarter of 2016, FireEye managed to grow revenue by just 12.5% year over year. That's down from 45% growth during the third quarter of 2015. FireEye has been chronically unprofitable since its founding, posting a staggering $539 million net loss during 2015. However, the market largely didn't care about these losses as long as revenue growth met expectations.

FEYE Chart

FEYE data by YCharts.

With FireEye now struggling to grow, those massive losses can no longer be ignored. The company announced a major restructuring in August along with its second-quarter results, and an effort to knock down costs by laying off a few hundred employees. The company has set a goal of producing positive free cash flow in 2017, but with significant stock-based compensation expense, producing a GAAP profit is still in the distant future.

Now what

FireEye expects its fourth-quarter revenue to grow by just 1%-4% year over year, although CEO Kevin Mandia is optimistic that new products will eventually return the company to robust growth:

I believe we are in the early phases of the richest new innovation cycle in our history, and these are the first of many planned releases that will help customers elevate their security profile at a lower total cost of ownership. The investments we've made in intelligence, orchestration, and integration are redefining the FireEye security platform and creating new engines for growth.

FireEye is still valued at about $2.2 billion compared to expected revenue of between $716 million and $722 million for 2016. With the company's growth grinding to a halt, the market isn't as pessimistic as it seems. FireEye will need to return to meaningful growth and improve its bottom line in 2017 just to justify its current valuation. Anything short of that could lead to another terrible year for the stock.

Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends FireEye. The Motley Fool has a disclosure policy.