Cyber security has been a particularly hot topic over the last year. When Target (TGT) had to admit that millions of credit card numbers had been compromised, it seemed like the retailer was in hot water –and It was. Yet, at this point, enough major box stores have admitted to similar security breaches that not having one could just as easily be a sign a store has failed to expose their leak rather than it not existing.
FireEye (FEYE) doesn’t work within a segment of cyber security that’s at all related to retailers protecting customer credit card information. However, it’s not hard to see how the rising tide of concern about various cyber security issues in recent years likely helped stir market enthusiasm for popular cyber security company FireEye after it IPOed in late September of last year.
Well, just over a year in, the shine has worn off. A disappointing Q3 earnings report shows another quarter of slowing growth for sales, another quarter of expanding losses, and another plunge for a stock that’s been tanking since hitting its peak at the end of February.
Another Weak Quarter Sends FireEye Shares South
It’s not every day that a 168% year-over-year increase in revenue prompts a more-than 15% decline in a company’s stock, particularly when losses were narrower than analyst expectations, but the enthusiasm surrounding the stock early in the year is likely still in the process of unraveling and FireEye needs to produce big results to shore up its decline.
Revenue came in at $114.2 million for the quarter ending September 30, slightly behind the $116.2 million projected by consensus analyst estimates and at the low end of the $114 million-$117 million called for in the company’s guidance. The net loss for the quarter was $0.51 a share, narrower than the $0.55 a share anticipated by analysts, but any goodwill produced by the earnings beat was lost when the company shaved guidance for the current quarter to a revenue range of $135 million to $147 million and a loss of $0.46 to $0.50 a share. Analysts were calling for guidance of $143.8 million and a loss of $0.49 a share.
FireEye CEO David DeWalt played down the perceived negative, as CEOs are wont to do. Contacting MarketWatch prior to the earnings call, DeWalt emphasized that he felt that billings rather than revenue were the best forward-looking metric by which to judge the company’s prospects for growth.
“Revenue is a trailing indicator of our business,” he said. Continuing later about the company’s 45% jump to $165.1 million in billings for Q3, “We did everything we said we would do — we exceeded it and raised it.”
Lengthy Decline for One-Time Wall Street Darling
For the first four months of public trading, FireEye looked to be a stock headed to the moon. With an IPO price at $20 a share, it popped 80% to $36 on its first day and peaked at $97.35 on March 5. Since then, the company’s been in a freefall, with shares dipping as low as $28.39 in Wednesday trading. While that remains above the company’s IPO price, a level FireEye still hasn’t fallen below, it does mean that the company valuation has taken a huge hit. Currently sporting a market cap just over $4.25 billion, FireEye’s seen a nearly 70% decline from its peak value of nearly $14.5 billion.
The reasons for the company’s decline aren’t exactly a mystery when one looks at their earnings on both a quarterly and annual basis. Growing revenues don’t appear to be arresting the increase in losses, something that should be pretty troubling, should that trend not be reversed in the relatively near future.
And a look at the company’s DuPont Report only bolsters concerns about the stock’s future. The DuPont system for analyzing companies involves breaking the all-important metric of return on equity (ROE) into three components in order to get a more detailed view of the fundamentals.
For FireEye, it exposes that not only does the company offer a pretty weak return on its equity, but it’s weak for all the wrong reasons. The company is way below its competitors in terms of its net margin, a bad sign, while falling well behind industry average for both asset turnover and its equity multiplier. The net margin, in particular, is a point of great concern. Being heavily leveraged or showing less-than-ideal efficiency in turning over assets are traits that a company can work with, but failing to make enough money off its business activities usually signifies real weakness.
Still, the cyber security firm still has the eye of major analysts. Wednesday saw Goldman Sachs, FBR Capital, and Nomura all reiterate their buy ratings on the stock (though it came with FBR slashing its price target from $58 to $37 and Nomura from $48 to $40). The stock still has strong buy ratings from 12 of the 18 analysts covering it (for now) and, should it work out its margin issues in the long run, is in what most market watchers see as a strong growth industry.
