FireEye (MNDT) lost about a third of its value this year due to two major challenges. First, the cybersecurity firm's first-quarter guidance disappointed investors in February. Second, the novel coronavirus (COVID-19) pandemic crushed stocks across the board.
Yet the coronavirus crisis also sparked a surge in remote work, which could bolster demand for cybersecurity services. So is FireEye, which trades at less than one times its annual revenue, a potential turnaround play in this volatile market?
Image source: Getty Images.
What does FireEye do?
FireEye provides threat detection services that intercept attacks before they breach a network. Over the past few years, FireEye pivoted away from on-site appliances toward cloud-based services.
That strategic shift reduced its revenue, since appliances initially cost more than cloud subscriptions, but it also locked in customers and stabilized its annual returns. FireEye also reduced operating costs at its core business, and expanded its ecosystem by acquiring smaller companies like iSight, Invotas, The Email Laundry, X15 Software, Verodin, and Cloudvisory over the past four years.
FireEye serves over 8,200 customers across 103 countries, including roughly half of the Forbes Global 2000. However, FireEye still faces fierce competition from larger rivals like Cisco (CSCO -0.50%) and Broadcom's (AVGO 3.84%) Symantec, which are both frequently cited as suitors in a potential takeover.
How fast is FireEye growing?
FireEye's growth in revenue and billings decelerated significantly over the past five years:
|
Growth (YOY) |
2015 |
2016 |
2017 |
2018 |
2019 |
|---|---|---|---|---|---|
|
Revenue |
46% |
15% |
5% |
7% |
7% |
|
Billings |
35% |
3% |
(6%) |
12% |
8% |
YOY = Year-over-year. Source: FireEye annual reports.
That slowdown can be attributed to its shift from appliances to services and tough competition in the cybersecurity market. It's also generating more revenue from cloud and virtual subscriptions, which have shorter contracts than hardware-tethered subscriptions.
For 2020, FireEye expects its revenue to rise 5%-6%, with just 0%-3% billings growth. It offered that guidance in early February -- before the coronavirus crisis escalated into a full-blown pandemic -- but hasn't updated those numbers yet.
On a non-GAAP basis, FireEye's gross margin contracted from 75% in 2018 to 73% in 2019, as its operating margin receded from 3% to 1%. It expects its non-GAAP gross margin to decline to 71% in 2020, due to a higher mix of lower-margin professional services, but for its operating margin to expand to 5%-6% as it cuts costs and integrates newly acquired businesses like Verodin.
FireEye still isn't profitable on a GAAP basis, mainly due to stock-based compensation expenses, which consumed 17% of its revenue in 2019. Its cash and equivalents also declined 18% to $334.6 million in 2019, but its short-term investments stayed nearly flat at $705 million.
Why aren't investors excited about FireEye?
Investors generally favor two types of cybersecurity stocks: those with robust revenue growth that aren't fretting over profits yet, and those that generate slower growth with sustainable profits. FireEye, an unprofitable company that generates single-digit revenue growth, doesn't fit either category.
Image source: Getty Images.
Investors looking for a higher-growth play would likely prefer Palo Alto Networks (PANW 0.91%), which posted 28% revenue growth last year. Those looking for a more profitable play would likely stick with CyberArk (CYBR -1.01%) or Check Point (CHKP -1.14%). That's why all three stocks currently trade far above their IPO prices, while FireEye trades nearly 50% below its IPO price of $20.
With an enterprise value of $2.7 billion, FireEye remains a potential buyout target for Cisco, Broadcom's Symantec, and other tech giants. However, previous reports claimed that FireEye was seeking offers of $30 or more -- which seem unlikely in this market as the pandemic forces companies to scale back their spending.
Is it time to buy FireEye?
Lockdowns and remote work might boost billings for certain cybersecurity companies, but I'm not convinced they'll generate major tailwinds for FireEye. Companies that want to bundle cybersecurity services with collaboration software could stick with Cisco, and those that want end-to-end solutions might flock to larger players like Symantec.
Meanwhile, investors can still pick up higher-quality cybersecurity plays like CyberArk, Palo Alto, or CheckPoint after the recent market pullback. Investors should be picky in this brutal market, and FireEye simply isn't strong enough to warrant a recommendation yet.
