Shares of cybersecurity firm FireEye (NASDAQ:FEYE) have been cut in half over the past year. That decline, which pushed the stock below its IPO price, was mainly caused by concerns about its financial discipline, executive turnover, and rising competition. However, FireEye stock recently rebounded on two positive developments.

Image

Source: PIxabay.

First, it pre-announced fourth quarter sales of $184 million to $185 million, which matches its prior guidance for $182 million to $190 million. Billings are expected to be between $256 million to $257 million, reaching the high end of its prior guidance of $240 million to $260 million. Second, FireEye acquired threat-intelligence service iSight for $200 million in cash. If iSight reaches an unspecified bookings target before the end of FireEye's second quarter of 2018, FireEye will pay the firm up to $75 million more in cash and stock. FireEye expects the deal to be "slightly accretive" to its operating income and cash flow in 2016.

Those announcements helped FireEye climb back from its all-time low of around $13, but how long will the rally last? Let's dig deeper into FireEye's strengths and weaknesses to decide.

Why FireEye matters
Unlike many cybersecurity firms, which only identify or isolate attacks after they hit, FireEye offers threat prevention solutions. FireEye was the first cybersecurity firm to be certified by the U.S. Department of Homeland Security, and was called in to investigate major data breaches at U.S. companies over the past few years.

That "best in breed" reputation helped FireEye secure a security services partnership with Hewlett-Packard Enterprise, a threat-intelligence sharing deal with Check Point Software, and an integration deal with F5 Networks' application delivery controllers. It also helped Visa create Visa Threat Intelligence, a subscription-based service which providers real-time data on threats to card issuers and merchants.

Reasons to buy FireEye
According to the Identity Theft Resource Center, a total of 169 million personal records were exposed last year in data breaches, up from 85.6 million in 2014. As a result, demand for cybersecurity services will likely surge over the next few years. Research firm Markets and Markets expects the global cybersecurity market to grow from $106.3 billion in 2015 to $170.2 billion in 2020.

Image

FireEye's cyber threat map. Source: FireEye.

FireEye's growth reflects that demand. In fiscal 2014, its revenue soared 163% annually to $425.7 million. Looking ahead, analysts expect its revenue to rise 47% in fiscal 2015 and another 30.5% in fiscal 2016. While that growth is slowing down, its business doesn't look like it will peak anytime soon, and analyst forecasts haven't been adjusted for iSight's upcoming contributions to FireEye's top line. FireEye's total deferred revenue also rose 61% annually to $454.9 million last quarter, indicating that demand for its services remains strong.

With a P/S ratio of 4.1, FireEye stock remains fundamentally cheaper than cybersecurity peers Palo Alto Networks (NYSE:PANW) and CyberArk, which respectively trade at 12 and 10 times trailing sales.

Reasons to avoid FireEye
FireEye's biggest weakness is its lack of a defensive moat against bigger rivals like Cisco (NASDAQ:CSCO) and Palo Alto. Cisco, which acquired cybersecurity firms like SourceFire and ThreatGrid, has been adding similar threat prevention services to its security portfolio. Cisco often bundles these security products with its own networking hardware, which can prevent smaller challengers like FireEye from gaining ground among enterprise customers. Palo Alto, which develops an industry-standard firewall for businesses, also acquired cybersecurity firm Cyvera in 2014 to expand its threat-detection abilities.

To counter these threats, FireEye will need to boost its R&D and marketing expenses. Unfortunately, FireEye remains unprofitable and burns through cash quickly. During the third quarter, its GAAP net loss widened from $120 million a year earlier to $135.5 million due to higher operating expenses and stock-based compensation. For 2015, it expects its operating margin to remain between negative 38% and 39%.

FireEye's cash and equivalents rose from $146.4 million last year to $463.9 million, but only because it did a convertible debt offering to raise $800 million last May. CFO Michael Sheridan, who had been with FireEye since 2011, also abruptly resigned last July, casting doubts on the company's financial discipline. FireEye's insiders also don't seem confident in the company's future -- over the past 12 months, insiders only bought 725,000 shares, but sold 2.6 million shares.

The verdict: FireEye remains a high-risk play
FireEye sells essential security services for an increasingly connected world, but its stock has too many problems to ignore. Sales growth, while robust, is slowing down. FireEye's net losses are widening, and it will likely need to keep burning through cash to keep up with its better-funded rivals.

In a volatile market, FireEye shares could decline further due to its lack of earnings-based support. I'm not saying that investors should avoid FireEye, but they should approach this stock carefully and fully understand its risks.

Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Check Point Software Technologies, FireEye, and Visa. The Motley Fool recommends Cisco Systems, CyberArk Software, 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.