Shares of cybersecurity company FireEye (FEYE +0.00%) have struggled since going public back in 2013. The stock has been cut in half from its debut price in spite of the fact that its revenue has doubled several times during that same period. It looks like a great growth story waiting to happen, but there are a few factors cautious investors should weigh first.
What happened?
FireEye, valued at only $3.5 billion, is a small company in the fast-growing cybersecurity industry. With the rising need for businesses to keep their digital assets secure, FireEye has been investing for growth at the expense of the bottom line.
|
Metric |
2017 |
2016 |
2015 |
2014 |
|---|---|---|---|---|
|
Revenue |
$751.1 million |
$714.1 million |
$623.0 million |
$425.7 million |
|
Year-Over-Year Revenue Growth |
5% |
15% |
46% |
163% |
|
Research and Development (R&D) Expense |
$243.3 million |
$279.6 million |
$279.5 million |
$203.2 million |
|
R&D as % of Revenue |
32% |
39% |
45% |
48% |
|
Sales and Marketing (S&M) Expense |
$371.9 million |
$439.5 million |
$476.2 million |
$401.2 million |
|
S&M as % of Revenue |
50% |
62% |
76% |
94% |
Chart by author. Data source: FireEye quarterly earnings.
FireEye's spending spree on R&D and S&M has pushed the company into the red, but those efforts paid off early on with big revenue increases. Losses in the short term are acceptable as long as the company has something to show for it, but that's been the problem lately. Sales have sputtered to annual single-digit growth, causing the stock to plummet.
Will FireEye rebound?
The cybersecurity industry is growing, but FireEye's product is viewed as more of an add-on to a company's existing threat-detection system rather than a comprehensive plan. As a result, some of its larger peers like Palo Alto Networks (PANW 4.41%), Juniper Networks (JNPR +0.00%), and tech giant Cisco (CSCO 1.35%) have fared much better the last few years. In response to its slowdown, FireEye has begun offering additional services and features to create a more well-rounded menu for its customers.
Image source: Getty Images.
Additional risks arise with this strategy, though, especially as FireEye begins to compete more directly with other cybersecurity companies. The good news is that revenue growth accelerated to 10% year over year in the last reported quarter. Management thinks that 2018 sales will be $815 million to $825 million, at least a 10% annual increase. That pales in comparison to growth a few years back, but it's nevertheless an improvement over the last 12 months, if those numbers transpire as forecast.
Expenses on R&D and marketing are being trimmed, too, bringing profitability a little closer. Losses in 2017 were $1.71 per share compared with $2.94 the year prior. Management again struck an upbeat tone for 2018 as it expects losses to continue decreasing.
So, does FireEye have the potential to make investors lots of money? Maybe, but a shift in strategy to reach more potential customers is still unproven. Though cybersecurity is in high demand and likely to stay that way for some time, FireEye's current growth trajectory is underwhelming and lagging behind the competition.
For investors looking for a cybersecurity stock, I think a bigger security company like Palo Alto Networks or Check Point Software Technologies (CHKP 5.55%) would be a better option. At this juncture, I think FireEye's high expenditures and sluggish revenue growth outweigh the potential benefits of buying the stock.
