Symbol not found

:FEYE   00:00AM GMT
0.00 (0.00%)
StockTwits Share  Twitter Share  Facebook Share

Why FireEye May Be Ready to Explode (or Implode)



UPDATE 8-18-2015

FireEye lives in the world of cyber security and the stock has a tendency to move every time there is news of a major breach or hack (remember Sony and the move "The Interview."). But there's a lot more going on than reactive news. Some would say, there's a booming business. But, others would say it's not a business that's booming, rather its a revenue machine that for every dollar that comes in costs $2 going out. I'll show you both sides, and let you decide if FEYE is truly ready to boom, or if it's going to forgotten if this economic cycle we're in starts to turn. Interestingly, while FEYE competes with Vasco (VDSI) and CYBR, it also does dip its toe into the world of CSCO (CSCO) and Juniper Networks (JNPR).

Earnings are due out July 30th and the option market reflects a bit of an upside bias. Here is the skew chart.

While the company was in the "lab" for about five years before it released its first product in 2008, the success in terms of adoption has been pretty astounding. With some foresight, the team created solutions that were "cloud based scalable." Of course, as stated earlier, it didn't hurt that the term "hacker" grew from a techy term to a part of the social vernacular.

Interestingly, FireEye was pretty innovative in that it focused its solutions on hackers as opposed to what the world had been focusing on before, which was a sort of combination of malware, virusware and firewalls. FEYE took the approach (and continues to take the approach) of getting the people behind the attacks before they happen and therefore looking to provide zero infections or hacks, not fixing infections and hacks that had taken place already. This sounds sort of trivial today, but back in 2008, it was rather novel.

Having said all of that "good" stuff, there is a lot of bad as well. Net income (TTM) is haemorrhaging losses and it has been trending down for more than five consecutive quarters to now nearly negative half a billion dollars. Free cash flow is negative and operating margins are absolutely atrocious. But, earnings estimates have risen in the last couple of months with the consensus estimate for this quarter's revenue rsing from $125 million to $164 million.

Technicals   |   Support: 46.49   |   Resistance: 49.69   

Golden Cross Alert:
The 50-day MA is now above the 200-day MA.
Swing Golden Cross Alert: The short-term 10 day MA is now above the 50 day MA.

FEYE has a two bull (low rated) technical rating because it's trading below both its 10-day (short-term) and its 50-day (medium-term) moving averages. We do note that the stock is trading above the long-term 200-day moving average.
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-08-04 $-0.84 $164 M $164 M $125 M Provided by ZACKS

Here are the core fundamental factors driving the company's two star fundamental rating.

Fundamentals Rating Summary

Revenue (TTM US$ Millions) 477 207 98

Operating Margin (QTR) 0.486 0.41 0.54 RISING

Net Income (TTM US$ Millions) -477 -195 -57

Levered Free Cash Flow (TTM US$ Millions) -74 -100 RISING

Research and Development (US$ Millions) 66 42 10 RISING

Research and Development Expense/Revenue 0.523 0.567 0.354 FALLING

Stock Returns and Chart

FEYE is up +6.8% over the last three months and up +39.0% over the last six months. The stock price is up +28.4% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at an all-time stock chart.

Click here to interact with this stock chart

Now let's examine the visualizations of the critical financial measures.

Revenue (TTM US$ Millions) 47720798

This is the best part of the story for bulls. Revenue is ripping and trending, or in English, FEYE has seen revenue (TTM) rise for every quarter it has been public, breaking new all-time highs each time. As of today the company revenue in the trailing-twelve-months is just under half a billion dollars.

When a company grows revenue 130.33% year-over-year, we must recognize the added importance of top-line growth, perhaps even above and beyond earnings, free cash flow and margins. Regardless of the low 2 fundamental (star) rating, if revenues continue to explode, everything could follow suit for FEYE.

What do all these numbers mean?
FEYE's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below and note the green bar represents the all-time high.

Click Here to Interact With This Chart

Operating Revenues/Operating Expense 0.4860.410.54RISING

Operating revenue over operating expense simply shows us how much revenue (in dollars) is generated for every dollar of expense. The ratio must be (at a minimum) above 1.0 in order for a company to turn an operating profit. For the latest quarter FEYE showed a ratio of 0.49. So, to put that into terms that are understandable, for every $0.49 in revenue that FEYE generates, it pays $1 to generate it. Or, scaled differently, FEYE pays more than $2 in expense to generate $1 in revenue. That's really bad.

What do all these numbers mean?
A year ago Operating Revenues/Operating Expense was 0.41. In the last year we can see operating margins are increasing but are still less than 1.0 (the minimum level needed to turn an operating profit).

FEYE's fundamental rating was affected from the operating margin numbers in the following ways:
1. The current value is below the critical 1.0 level (the firm generates an operating loss).
2. The one-year change was positive (raises the rating a little).

Let's look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.

Click Here to Interact With This Chart

Net Income (TTM US$ Millions) -477-195-57

Given the awful operating margins, that means that as revenue grows, losses actually get larger Losses have broken new all-time lows for five consecutive quarters. The firm now stands at an annual loss of $476 million, which is basically exactly the revenue number of $477 million. Again, in English, for every dollar of revenue FEYE generates, it pays $2 for it.

Click Here to Interact With This Chart

Research and Development (US$ Millions) 664210RISING

Normally I turn to free cash flow, but for FEYE it looks like net income and doesn't add a lot to the conversation at all. It's negative and bad, and ya know. What does add to the conversation is an examination of research and development (R&D).

Research and Development (US$ Millions) in the most recent quarter for FEYE was $66 million which is up 56% year-over-year and an astounding 550% over two-years ago. Remember, FEYE posted an annual loss of $476 million. Well, R&D over the last four quarters is about $250 million. So, the firm is investing heavily in its business, and yeah, that's crushing earnings and operating margins.

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars and note the green bar is the all-time high.

Click Here to Interact With This Chart

FireEye has been innovative since inception, quickly recognizing the need for cloud based solutions when that term was hardly even, ya know, a term. It also went after security in a totally different way than its peers, which was to get the hackers before they attacked, rather than to get the malware that was left over after the attack. The revenue growth has been explosive, but that must be tempered by the fact that the firm pays $2 for every $1 in revenue and that means, more revenue right now actually results in larger losses. What's the famous saying, "you can't make it up on volume f you're losing on every unit sold." Of course, it's not that simple. FEYE does have a unique place in this industry, its growth is evidence of that and its relatively low cancellation rate is also evidence of that. The bull / bear tug of war is a true battle onthis one, but there may be great things to come for this company... or not (?).

Last quarter the company announced four new partnerships and I'll just copy and paste them from their press release below for convenience.

Announced a global alliance with HP to deliver incident response and advanced threat services to HP customers worldwide.
Announced a partnership with Check Point Software Technologies to share threat intelligence between the FireEye NX Network Threat Prevention Platform and Check Point's firewalls.
Established the Fuel Cybersecurity Intelligence Coalition to share threat intelligence and integrate security workflows across IT technologies and vendors.
Launched the first joint Advanced Security Operations Center with Singapore Telecommunications Limited (Singtel) in Singapore

other security stocks I have written about include Vasco (VDSI). You can read that reort here: Why Vasco Could Be The Best Cyber Security Stock

Get a Trade Card just like this for ANY company by simply entering the symbol: