Can FireEye Rally Above Its IPO Price This Year?

Cybersecurity services firm FireEye (MNDT) went public at $20 in 2013, and surged to the mid-$80s in less than half a year. Unfortunately, secondary offerings, executive departures, decelerating growth, and unsustainable valuations eventually crushed the stock, which now trades about 20% below its IPO price.

FireEye's latest quarterly report, which topped analyst expectations but featured soft guidance, indicated that the stock would stay in the penalty box. But could FireEye finally break out of its rut later this year?

Check out the latest FireEye earnings call transcript.

Image source: Getty Images.

The key numbers

FireEye once generated double- and triple-digit sales growth, but its growth decelerated to single-digit levels in recent years for two main reasons.

First, the company pivoted from lower-margin, on-site appliances toward higher-margin, cloud-based services. This move improved its profitability but dented its revenue growth, since FireEye generated higher revenue from installing appliances. However, that strategy also stabilized the company's long-term revenue growth by locking in customers.

Second, FireEye struggled to compete against bigger competitors like Cisco (CSCO 0.06%), Symantec (GEN 0.72%), and Fortinet (FTNT 1.00%), which bundle similar threat prevention solutions with other services.

These headwinds all throttled FireEye's sales growth, but its profitability improved as it cut costs and relied more on cloud services. Here's how FireEye's revenue and billings growth held up over the past year:

Year-over-year growth. Source: FireEye quarterly reports.

FireEye expects its revenue to rise 6% annually at the midpoint in the first quarter, but for its billings to stay roughly flat. FireEye attributes that abrupt decline to a lack of larger deals (greater than $5 million) in the first quarter. In the prior year quarter it generated about $25 million in revenue from three of those larger deals, so it now faces a tough year-over-year comparison.

On the bright side, FireEye fulfilled its promise to achieve non-GAAP profitability in fiscal 2018. Those improvements enabled FireEye to generate positive free cash flow (FCF) for the full year:

Source: FireEye quarterly reports.

However, FireEye expects to report a non-GAAP net loss of $0.03 earnings per share at the midpoint for the first quarter due to its slower growth in billings and rising operating expenses. The company also remains deeply unprofitable on a GAAP basis.

Image source: Getty Images.

The forecasts and valuations

FireEye expects its revenue and billings to rise just 6% and 7%, respectively, for the full year. However, it still expects its non-GAAP earnings to more than double to $0.17 to $0.21 per share and for its FCF levels to stay positive.

Those numbers indicate that FireEye's growth is stabilizing, but its numbers still look anemic compared to those of its larger peers. FireEye's total revenue rose 7% to $831 million in 2018, but Cisco grew its Security revenue 9% to $2.35 billion last year, and Symantec and Fortinet both generated more than 20% sales growth last year. FireEye also reports much lower (albeit improving) GAAP operating margins than any of those companies.

FEYE Operating Margin (TTM) data by YCharts

FireEye still trades at nearly 90 times forward earnings. Cisco and Symantec both trade at less than 15 times forward earnings, while Fortinet has a forward P/E of 40. FireEye's valuation could cool off as it keeps growing its non-GAAP EPS and FCF, but investors simply aren't drawn to underperforming underdogs in a wobbly market.

The tailwinds and headwinds

FireEye's closely watched cloud revenue rose 13% to $50 million last quarter and accounted for 23% of the company's top line. That growth was mostly driven by the expansion of its all-in-one platform Helix, along with its subscription-based network, email services, endpoint services, and other "expertise on demand" services. Its annual recurring revenue rose 9% annually to $553 million during the quarter.

If FireEye keeps growing its cloud and recurring revenue it can offset the slower growth of its older businesses. If it can maintain that balancing act while expanding its margins and boosting its earnings, it can win back investors and potential suitors.

Cisco and Symantec are both frequently cited as potential buyers, and FireEye's low enterprise value of $3 billion makes it an easy takeover for either tech giant. However, Cisco, Symantec, Fortinet, and other companies already offer threat prevention solutions similar to that offered by FireEye -- so it might be more economical to simply expand their own services rather than spend billions on FireEye's slow-growth business.

Stuck in neutral

Kevin Mandia, who became FireEye's CEO nearly three years ago, clearly stabilized the company's core business. Unfortunately, it still makes more sense for investors to stick with stable blue chip tech stocks like Cisco or higher-growth plays like Fortinet instead of FireEye. I think FireEye will remain stuck in neutral for the foreseeable future, and I'd be surprised if it reclaims its IPO price over the next few quarters.