FireEye (NASDAQ:FEYE) shares dropped 8% during regular market hours the day before it announced earnings, but the reaction once the numbers came out made that drop look small. Shares continued to tumble an additional 16% overnight, then dropped another 8% during the regular session.

Looking at the falling share price, a person would think that the fundamentals of the company are terrible. But that isn't the case. How much further can it go? Even competitors Palo Alto Networks (NYSE:PANW) and Fortinet (NASDAQ:FTNT) are trading down in sympathy.

Revenue of $74 million beat the $72 million consensus, and the loss of $0.53 was in line with what the Street was expecting. So why are shares getting clobbered?

Management is accelerating spending without proving that it can run its business profitably, and it has lost credibility with timed stock sales. The way this flows through to the financials is in guidance, which for the coming quarter is now expected to be a loss of $0.63-$0.58, compared with prior expectations for a loss of $0.51.

Full-year guidance is for revenue of $405 million-$415 million and a net loss of $2.10-$2.30 per share, which is now lower than the $2.03 per share the Street was previously expecting. Investors might trust that future profits would be higher if management hadn't lost credibility with the stock sales.

Competitors are being unjustly punished
FireEye isn't the only company being punished, Fortinet and Palo Alto Networks are down as well, at 3% and 9%, respectively. Neither of these companies has missed earnings recently. Fortinet has already reported the quarter and beat expectations by $0.01, while Palo Alto Networks beat expectations in six of the last seven quarters.  The valuation of each of these companies is high, but each is profitable.

What caused the increased loss?
At the time of the earnings announcement, FireEye announced that it would be acquiring nPulse, a Charlottesville, Virginia-based company that focuses on network forensics. This is similar to the black box in an airplane, since it records and analyzes what happened on a network after it has been attacked by hackers. FireEye didn't disclose the purchase price for nPulse in the press release or on the call.

Management's lost credibility
The biggest hurdle for the company now is the lost credibility of the management team. The company top-ticked its stock price by filing a secondary offering and pricing it at $82, $15 below the price of the shares just two days earlier. Then, just a week later, CEO David Dewalt sold 486,000 shares at $79.54. This sale could have been bundled with the secondary, but then the CEO would have had to state that he was selling, which would have put additional pressure on the secondary price.  Furthermore, it's difficult to believe that the management team didn't realize they were going to announce a weaker than expected quarter six weeks later that would send the shares into a downward spiral.

Valuation is now a big problem
Even though the company has met its sales targets, investors are concerned that it will continue to spend any profits to grow larger while drawing down its available cash. This dynamic presents a huge problem for all of the companies that are focusing on growth rather than profitability. Small technology companies need capital to grow, and investors have been willing to accept strings of losses as long as the share price continued to appreciate.

But in the last eight weeks, investors seem to have changed their minds about the importance of profits. Its very possible that the hedge funds that were burned on the long side in March are trying to make it up on the short side today. With no profits to cushion the fall, this weakness can continue.

David Eller has no position in any stocks mentioned. The Motley Fool recommends Palo Alto Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.