Are Investors Wrong to Ditch FireEye?

Company changed leadership and is positioned for growth

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May 11, 2016
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FireEye (

FEYE, Financial) is a specialist in malware protection and provides a signature-less attack recognition and protection platform. The outstanding software used by FireEye guards against the whole life cycle of advanced targeted attacks and is created to slip past traditional firewalls that might not be powerful enough to prevent advanced malware.

FireEye's MVX engine is especially recognized for its ability to "run" or detonate suspicious files in virtual areas to cut off threats, and this is known as "zero-hour" attacks. The zero-hour attacks are created to take advantage of any unknown vulnerability in the network.

FireEye also focuses on putting a stop to the continuous hacking attacks. These attacks are especially directed toward a specific target, like an attempt by a government intelligence service to crack into the system of another government. FireEye acquired Mandiant in 2014 to support its ability in this unit by making use of technologies created by Mandiant to help in detecting the sources of continuous, targeted attacks.

In general terms, the business seems to operate in a market that is unlimited in potential. So, why the recent plunge?

Investors' feeling toward the entire cyber security space took another turn last week when FireEye announced tepid financial results for its first quarter. FireEye also reduced its complete 2016 revenue outlook thereby adding pressure to its stock which fell more than 9% in extended trading.

The cyber security service provider appointed a new CEO, Kevin Mandia, the founder of Mandiant, who is tipped by the company to position FireEye for future growth.

The quarter in real numbers

FireEye announced total revenue of $168 million, failing to meet the consensus estimate of $171.82 million. However, its total income jumped over 34% compared to last year's same quarter, mainly due to the rise in end-market demand for its threat intelligence solution, along with its cloud-based subscriptions and "FireEye as a Service."

The company also experienced a 23% year-over-year rise in total billings to $186 million. However, its adjusted loss per share reached 47 cents, exceeding the expectations of the Street by 3 cents.

The former CEO of FireEye, David DeWalt, while commenting on the quarterly performance of the company, said, "Our ability to reduce the risk, mask the complexity and lower the total cost of ownership of cybersecurity for our customers positions us at the intersection of the powerful trends driving change in our industry."

"We continue to make the strategic investments in our intelligence-led threat management platform and international infrastructure necessary to take advantage of this growing opportunity. At the same time, we remain committed to accelerating our progress on the path to profitability," he added.

Various cyber security providers like Palo Alto (

PANW, Financial), FireEye and Cyberark (CYBR, Financial) face a difficult start to 2016, mainly because of the underwhelming demand in cyber security and soft spending. Also, the decline of the entire market has generated talk of possible M&As involving mid-tier and small companies like Cyberark and Barracuda Networks (CUDA, Financial).

So are investors right to ditch FireEye?

For short term-oriented investors, it might be right to sell the stock. FireEye gave a bleak view of its present quarter; the company expects the loss per share to be between 38 cents and 40 cents, missing the estimates of the Street by 2 cents.

Illustratively, FireEye anticipates revenues that are between $178 million and $185 million, compared to the consensus estimate of $192.75 million. For 2016, the company has reduced its revenue outlook to $780 million to $810 million, less than its previous $815 million to $845 million range. FireEye stock has declined more than 25% since the start of 2016.

Nonetheless, for those aiming for the long-term play, it’s good to note that FireEye's security budget is still growing despite a slight change in spending focus. Moreover, the "knee-jerk reaction" from the chief security officer to refresh the current security-based technologies is seen as a long-term effort to "better lock down" assets, improve products' effectiveness and acquire new and growing companies like mobile and cloud.

Also, given the fact DeWalt has stepped down as the chair and the subsequent appointment of Mandia, FireEye is well positioned for a better future. As such, this will leave growth investors interested.

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