FireEye (NASDAQ:FEYE) has been a stomach-churning stock to own over the past two years. It soared from an IPO price of $20 in September 2013 to $95 the following March. Since then, the stock has plunged back to the $20s due to concerns about competition, executive turnover, and its high valuations. Let's take a closer look at this beaten-down stock, and whether or not it's still a decent play on the growing cybersecurity market.

FireEye's real-time cyber threat map. Source: FireEye.

FireEye's fundamentals
FireEye provides cybersecurity solutions that shield companies from Internet-based attacks. Unlike many other traditional cybersecurity firms, which offer systems that identify attacks after they occur, FireEye focuses on threat-prevention solutions.

FireEye's income comes from four main sources: product revenue, product subscriptions, support and maintenance, and professional services. Product revenue and subscriptions respectively accounted for 34% and 33% of its top line last quarter. Support and maintenance revenue accounted for 15%, while professional services generated the remaining 18%.

FireEye's total revenues rose 56% annually in the second quarter, compared to 69% growth in the first quarter and 184% growth in the prior year quarter. That slowdown has caused concerns that FireEye's growth could flatten out in a few quarters. Like many of its cybersecurity peers, FireEye remains in the red with a net loss of $133.6 million last quarter, compared to a narrower loss of $116.8 million in the prior year quarter.

FireEye's weaknesses
FireEye's critics note that Palo Alto Networks (NASDAQ:PANW), Cisco (NASDAQ:CSCO), and other companies have recently launched threat-prevention products and services to challenge FireEye. FireEye is still considered the "best of breed" at protecting companies from malware, zero-day threats, and probing attacks, but it can't bundle its services into a larger package as some of its rivals can.

For example, Palo Alto added new threat-detection abilities, obtained through its acquisition of Cyvera, to its core firewall service. Cisco, strengthened by its acquisitions of cybersecurity firms SourceFire and ThreatGRID, added similar features to its security products, which are frequently bundled with its networking hardware.

In July, FireEye CFO Michael Sheridan, who had been with the company since 2011, resigned. That abrupt departure upset investors, since FireEye's financial track record had already been questionable:

  • Sept. 2013: FireEye raises $300 million during its IPO.
  • March 2014: FireEye raises $460 million in a secondary offering of 14 million shares (5.6 million from FireEye, the rest from existing shareholders).
  • May 2015: FireEye raises cash again with a convertible debt offering of $800 million (up from a previously announced $600 million).

FireEye finished last quarter with $725 million in cash and equivalents, but without its debt offering in May, that figure would have been negative. FireEye appointed Michael Berry, the former CFO of Informatica, as its new CFO in September, but it's unclear if he'll fare much better than his predecessor. 

FireEye's strengths
FireEye's core strength is its reputation as the "go-to" player in threat prevention. It was the first cybersecurity firm to be certified by the U.S. Department of Homeland Security, and was called upon to investigate data breaches at Sony, Target, and other major companies. Palo Alto, Cisco, and other rivals will need to prove their worth before being entrusted with similar tasks.

FireEye's reputation also helps it secure big partnerships. Earlier this year, it signed a security services partnership with Hewlett-Packard, a threat intelligence-sharing deal with Check Point Software, and agreed to integrate its security solutions into F5 Network's application delivery controllers. It also worked with Visa to create Visa Threat Intelligence, a subscription-based service that delivers real-time data on threats to merchants and card issuers.

These deals strengthen FireEye's standing as an industry leader, so concerns about competitors marginalizing the company via bundling strategies could be overblown. As data breaches increase in frequency and complexity, demand for FireEye's threat-detection solutions will grow. That's why FireEye's deferred revenue, or advance payments for future services rendered, rose 77% annually to $410 million, and outpaced its actual revenue growth.

The key takeaway
FireEye's trailing P/S ratio of 9.3 initially looks expensive compared to an average of 2.8 for the application software industry. But the company is also posting double-digit revenue growth, while most of its industry peers aren't. FireEye also isn't that expensive compared to Palo Alto Networks, which trades at 15.3 times sales.

Over time, FireEye's shares will stabilize as its revenue growth becomes more predictable and its losses narrow. For now, FireEye shares aren't for risk averse investors, and they could certainly fall further in this choppy market. But for investors who are willing to slowly accumulate a position over time to ride out the volatility, brighter days could be ahead.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.