Although investors are avoiding high-beta stock amid the ongoing market turmoil, FireEye (FEYE, Financial) can be considered a great speculative play. With the stock down over 60% in the last few months, investors can bet on it to benefit from the growing cyber security market.
A huge potential
FireEye is the only cyber security firm that proposes both incident management services as well as threat detection and prevention software. The company is unique from other cybersecurity firms as it not only detects or isolates attacks after they smash but also provides threat prevention solutions.
FireEye is the first cyber security company to be licensed by the U.S. Department of Homeland Security. In recent years, the company was called in to scrutinize major data breaches at U.S. companies.
In 2015, the company’s reputation helped it to secure a threat-intelligence contract with Check Point Software, a security services partnership with Hewlett-Packard and an incorporation deal with F5 Networks’ (FFIV, Financial) application delivery supervisors. The company also helped Visa (V, Financial) by delivering Visa Threat Intelligence, a subscription-based facility that offers real-time protection from threats to card issuers and merchants.
As per ITRC, an overall of 169 million personal archives were wide open in the previous year in data breaches, almost twice as many compared to the same period in 2014. This clearly indicated that demand for cyber security services will probably increase in the future. According to Markets and Markets, the worldwide cyber security market is projected to grow from $106.3 billion in 2015 to $170 billion in 2020.
A deal not so worthy
Recently, FireEye announced a deal with iSIGHT. The deal appears weird due to the timing. The company expects the deal to be accumulative, and iSIGHT is taking mostly cash in the transaction. As per the deal, the financial terms are $200 million to be paid in cash and an another $75 million in extra cash and equity upon achieving booking marks by 2018.
Keeping in mind the stock valuation of the company at present, one might anticipate an attentiveness in taking equity for the deal if iSIGHT saw the grouping forming a market prominent organization. The company trades for only 3x the projected top-line of $815 million.
On the other hand, the worthy thing is that iSIGHT will enhance operating income and cash flows although stockholders have wondered whether that offers much benefit. The company projects Q4FY15 operating income to endure negative and cash flow to touch approximately $8 million. The most frightening number ruins the projection for an undesirable operating margin approaching the 32% level of Q3FY15.
Conclusion
Positive cash flow can boost FireEye’s stock going forward, and the company is well ahead of schedule. The iSIGHT acquisition can help the company perform moving forward on cash flow basis, which in turn can boost the shares. Irrespective of the acquisition, FireEye has fallen too much too fast and is a good speculative play.
