It wouldn't be wrong to call FireEye (MNDT) a bad cybersecurity bet.
Longtime investors have burnt money in this cybersecurity stock thanks to the company's inability to beat the competition. FireEye's rate of growth suggests that it has been struggling to win business in this fast-growing industry, losing market share to more-enterprising rivals.
So when FireEye releases its fiscal 2019 third-quarter results on Oct. 29, investors will be hoping for the company to provide some proof that it can cut it in the competitive cybersecurity market. But will FireEye be able to deliver and become a top stock? Let's find out.
Image source: Getty Images.
FireEye's latest update has (temporarily) sparked confidence
FireEye reduced its full-year guidance in July, blaming a decline in legacy appliance sales and the shift to cloud-based offerings. Investors heaved a sigh of relief after it announced that third-quarter revenue will arrive at the higher end or exceed the $217 million-$221 million range. But even at the higher end of that guidance, FireEye stands to deliver just 4% annual top-line growth.
Lately, this positive development has given the stock some legs, but FireEye needs to deliver a convincing outlook to keep investors in high spirits. However, that is not guaranteed as a closer look at management commentary in the last earnings conference call indicates that customers could be moving away elsewhere. CFO Frank Verdecanna conceded that "[w]hile many of our large customers refreshed and even expanded their deployments with fifth-generation appliances over the past several quarters, many smaller customers allowed their subscriptions to expire without purchasing new hardware."
The fact that FireEye is losing ground in the cybersecurity industry can be seen in the potential revenue growth that the company plans to deliver this year. It anticipates full-year revenue of $870 million, an increase of just 5% from its 2018 revenue of $831 million. That's much slower than the 12% to 15% compound annual growth rate the overall cybersecurity market is expected to clock in through 2021, per Cybersecurity Ventures' estimates.
By contrast, competitors are growing at a much faster pace. Palo Alto Networks is promising 20% revenue growth in this fiscal year and the next, with Fortinet not far behind. This means that there are better stocks to buy in the cybersecurity space.
What gives?
FireEye's problems are of its own making. While its rivals were aggressively going after the fast-expanding cybersecurity market, the company decided to take it easy. It was stingy when it came to spending and shied away from taking a bigger portion of the cybersecurity market.
It's paying for that mistake now.
FEYE R&D expense (% of annual revenue). Data by YCharts.
However, FireEye believes that things will get better in the long run. At its recent analyst day, the company projected that its revenue could reach a compound annual growth rate (CAGR) of 12% to 16% through 2024.
FireEye expects most of this growth to come from the cloud subscriptions-related segment, which is expected to realize a CAGR of 27% to 32%. But achieving that lofty target isn't going to be a cakewalk. According to FireEye's 2019 guidance, the cloud subscription segment is expected to grow 14%, which is much slower than the segment's 25% growth last year.
Moreover, FireEye will likely have a difficult time walking the talk and doubling the growth rate of its cloud subscription business considering the pace at which its competition is growing at its expense. Analyst estimates also indicate that FireEye's revenue growth rate isn't going to improve drastically in the fourth quarter or in fiscal 2020.
Don't be surprised, therefore, if FireEye delivers another round of disappointing results and loses its recent stock market momentum.
