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1 Reason to Buy FireEye Stock, and 1 Reason to Stay Away

By Harsh Chauhan – Oct 24, 2017 at 10:18PM

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Subscriptions will push FireEye toward profitability, but Cisco could throw a spanner in the works.

FireEye (MNDT) has turned out to be a terrific investment this year. The cybersecurity specialist's stock hit a 52-week high earlier this month and has gained 40% so far in 2017. The company has enjoyed rapid improvements in key metrics and is getting close to becoming profitable on the back of a sustained growth in its subscription business.

FireEye's updated product line-up could keep boosting its subscription business, giving investors a solid reason to stay invested. But there's one factor that could derail FireEye's growth in the long run: the growing dominance of Cisco (CSCO 2.02%) in the cybersecurity space.

A hacker in a hoodie.

Image Source: Getty Images

FireEye is pulling the right strings to grow its business

FireEye is aggressively transforming its business model to get more revenue from the subscription side of the business. The company's subscription revenue jumped close to 15% year over year during the second quarter. This boosted its total revenue by 6% despite a 23% drop in product sales, which shouldn't be surprising as subscriptions now account for over 83% of the total business.

More specifically, FireEye's subscription and services revenue jumped almost $20 million year over year, allowing it to easily offset the $9.5 million reduction in product revenue. Looking ahead, the company's subscription and services business will get even better thanks to new feature additions to its endpoint security platform.

FireEye has announced a couple of big updates in the past few weeks. It introduced the latest generation of its FireEye Endpoint platform. The latest update allows the company's Endpoint security platform to fight multiple threats at once, quickly generating a detailed attack report to help the client respond to the threat.

FireEye has incorporated multiple threat detection techniques into this new platform, and it has also added a new feature -- FireEye Network SmartVision -- that uses machine learning to "detect suspicious lateral threat movements and data exfiltration."

These new product updates can help FireEye land more customers especially as awareness of threats has been raised in light of the recent Equifax breach that has potentially impacted 143 million Americans. In fact, Equifax has selected FireEye subsidiary Mandiant, which specializes in incident response, to review the extent of the damage caused.

Given that FireEye promises a shorter threat detection time, it isn't surprising to see why it has been called upon by Equifax. This could serve as a catalyst for FireEye's business by bringing in more clients in the second half of the fiscal year.

Boosted subscription business should help the company further reduce its cost profile as the margins on the subscription business are high. More specifically, FireEye's gross margin from subscription and services is 66%, significantly higher than the 53% gross margin of the product business.

Cisco could throw a spanner in the works

Networking giant Cisco has been making huge strides in the cybersecurity business of late. In fact, it is the company's fastest-growing segment, clocking 9% year-over-year growth in the recently concluded fiscal year 2016 with revenue of $2.15 billion. By comparison, almost all other segments shrank, so it isn't surprising to see why the networking specialist is now paying special attention to this space.

Cisco's recent product development moves have kept cybersecurity in focus in light of recent data breaches and malware attacks. For instance, the company is now using machine learning to glean insights from the huge amount of data that flows through its networks, which it predicts will not only allow its clients to reduce the possibility of security breaches by 48%, but also lower operating costs by 61%.

Cisco's hardware and software won't just improve the security capability of clients' networks, but it will also reduce network provisioning time by 67% (allowing for faster deployment), as well as cut issue resolution times by 80%. This is a big advantage for Cisco as it is capable of bundling its networking solutions with its cybersecurity products.

In fact, the company was testing this software with 75 clients on a pilot basis back in June, claiming that it is effective 99% of the time. Now, as Cisco controls over 55% of the global Ethernet switch market, it has a strong cross-selling opportunity for its cybersecurity products, giving smaller players such as FireEye sleepless nights.

Cisco's cybersecurity business already has three times the revenue generated by FireEye in the past 12 months. The gap between the two companies should keep increasing thanks to Cisco's established sales channels and an impressive cash position of over $11.7 billion, which is significantly higher than FireEye's $870 million cash hoard.

There are rumors that Cisco could consider buying out FireEye. But this is just speculation right now, which means that Cisco is better-positioned to increase its cybersecurity lead and potentially hurt FireEye's turnaround.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends Cisco Systems and FireEye. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Mandiant, Inc. Stock Quote
Mandiant, Inc.
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
$41.34 (2.02%) $0.82
Equifax Inc. Stock Quote
Equifax Inc.
$173.13 (2.24%) $3.80

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