Will FireEye Stock Recover in 2016?

The Presentation inside:

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Will FireEye Stock Recover in 2016? Factors which may fuel a recovery for FireEye in the coming year.

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Situation FireEye, Inc. stock appreciated rapidly in the first half of 2015, at one point rising more than 70% for the year. The back half of the year has resulted in a different outcome. The "FEYE" symbol lost all of its gains after June, and is now down 33% as the year winds to a close.

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1) External factors behind the stock decline The overall stock market has drifted lower since summer, and the cyber security sector has in particular deteriorated. On the following slide we see a year-to-date chart of the PureFunds ISE Cyber Security ETF:

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2) Factors specific to FireEye Fiscal Q3 2015 earnings released in early November showed evidence of slowing growth. Billlings of $210.6 million missed the company's own guidance range of $225-$230 million. Management scaled back full year billings guidance to $780-800 million, from a previous band of $840-$850 million.

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2) Factors specific to FireEye (cont.) While many cyber security companies operate in the red, FireEye's losses are heavier than competitors'. For example, FireEye posted a 74% negative operating income margin in its most recent quarter. This compares unfavorably to peers Splunk Inc. (negative 42% in most recent quarter) and Palo Alto Networks Inc. (negative 10% in most recent quarter).

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Demand is also under scrutiny The perceived need for cyber security products by organizations is cyclical, and often news-driven. Prominent cyber attacks tend to drive sales (and stock prices of security companies). We are currently in a relatively quiet news cycle. FireEye's CEO blamed a recent cyber espionage cooperation agreement (in principle) between the U.S. and China as a factor in weakening demand.

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Factors which may lift FireEye in 2016 Increased success of Mandiant professionals, the consultant group FireEye acquired last year, which routinely lands large software and monitoring contracts. A resumption of billings growth. As FireEye's customer base matures, the company has the potential to sell additional products to its current clients, alongside new customer sales, lifting billings. Continued work on operating margin. The company's profitability is actually improving, after previous quarters of negative 100%+ operating income margin. But it needs to bring margins closer in line with peers.

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Factors which may lift FireEye in 2016 (cont.) Continued aggressive development of software-as-a-service offerings, in the mold of the popular "FireEye as a Service" cloud-based threat detection and prevention software. A perception that the company is now fairly valued, or cheap, may help lift FireEye stock next year. As you can see from the following slide, FireEye now trades at one-half the forward price-to-sales valuation of competitors Splunk and Palo Alto Networks:

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“Consistent with the history of cyber security as defenses against attacks increase, the attackers adapt. The only way to keep up is to be the vanguard of the industry. The threat intelligence we gain from our fast service and Mandiant professional services offerings creates a sustainable, competitive advantage for us, an advantage that remains uniquely ours, as well as we continue to be the first to the major breaches." --CEO Dave DeWalt, Q3 2015 Earnings Call Above all, FireEye should seek to hone its competitive advantages:

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Going Forward As we discussed earlier in this presentation, demand for cyber security products ebbs and flows through each calendar year. It's an external factor which FireEye has little control over. So, the company should redouble its efforts to grab market share while whittling away at its negative margins. This is the foundation for a rebound in FireEye stock in 2016.

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