FireEye (NASDAQ:FEYE) is a volatile stock -- and that is putting it mildly. Since its public market debut in late 2013 at $20, FireEye shares have surged as high as $85 and fallen as low as $24.
Currently, shares of FireEye are trading right around $44 a share. That is exactly where they should be, according to analysts at Raymond James. In a report published late last month, Raymond James initiated coverage on FireEye with a market perform rating. Although the analysts believes FireEye has a lot of potential, its business model is also fraught with risks.
FireEye is growing rapidly
There are two things to like about FireEye: rapid growth and dominance in an emerging cyber-security market.
Last year, FireEye revenue rose an impressive 163% on an annual basis. If its guidance proves accurate, it will rise another 42% to 46% this year. Many other cyber-security vendors cannot offer anything approaching those numbers.
This rapid growth likely comes from the novel status of its products. In contrast to other vendors, which rely on more traditional solutions, FireEye sells a class of products designed to stop advanced persistent threats. Its virtual sandbox tests potentially malicious software in real time, allowing it to find exploits and vulnerabilities as the attacks occur.
FireEye has other competitors in this space, but its products are widely viewed as best-in-class, according to Raymond James. It believes FireEye currently has roughly half the market for sandbox solutions.
The market for its products is difficult to project
There are also plenty of things about FireEye that should make investors cautious. FireEye faces intense competition, continues to burn through cash, and the size of its business is difficult to project.
FireEye may offer the best sandbox solution, but it is not the only vendor. Palo Alto Networks, Cisco, and Trend Micro offer similar products. Other companies are expected to eventually enter the space, and in time, FireEye sales could be poached by larger companies that are able to offer APT solutions bundled with other products, such as firewalls.
FireEye is also not profitable, and management does not expect that to change anytime soon. In 2014, FireEye burned through about $200 million in free cash flow. Raymond James believes the company will eventually achieve profitability, but it does not expect positive free cash flow until 2018.
Lastly, the novel nature of the FireEye business makes the size of its future prospects difficult to project. Although IT departments are given fixed budgets that include spending on traditional cyber-security products, APT is often unaccounted for. That is an issue, as FireEye offerings are largely seen as a compliment to, rather than a replacement for, traditional offerings. FireEye has said its total addressable market could be as large as $30 billion, but Raymond James is skeptical. Instead, its analysts believe the total demand for APT products will be around $3.6 billion in 2019.
A speculative investment for those seeking cyber-security exposure
Given its lack of profitability, it is difficult to value FireEye with traditional metrics. On an enterprise value-to-revenue basis, FireEye is aggressively valued compared to more established security vendors but less expensive compared to other small, speculative stocks.
FireEye is currently trading at about 15 times enterprise value-to-revenue. That is better than its competitor Palo Alto Networks -- trading at about 17 times -- but worse than a profitable company like Check Point Software trading at about 10 times.
Given this blend of opportunities and challenges, it is easy to see why shares have traded so erratically. In the long run, FireEye will either successfully ramp up its business with continued dominance in the market or get muscled out of its niche as it burns through cash.
Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Check Point Software Technologies, Cisco Systems, FireEye, and 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.