Forget the Bears – Buy FireEye (FEYE) Stock!
Last week, analysts at Morgan Stanley posted some encouraging words regarding cybersecurity outfit FireEye Inc (NASDAQ:FEYE), ultimately setting the stage for its upgrade of FEYE stock. Specifically, the bank upped its opinion of FireEye stock from equal weight to overweight, the highest rating Morgan Stanley’s ever had of FireEye, suggesting even it is finally coming around to the company’s recent reconfiguration of its business model into a subscription-based business.
Still, this is a name that’s not getting a whole lot of love from Wall Street; the consensus target price of $16.68 is only about 4% better than the stock’s current value of around $16.50 per share, and most analysts still deem it a mere hold despite clear sales growth and a continued march to profitability.
It begs the question: What does Morgan Stanley see in FEYE that few others see? A close second question: Is Morgan Stanley right?
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Here’s Morgan Stanley Says about FireEye
The timing of the upgrade couldn’t have been more fortuitous. Morgan Stanley upgraded FireEye stock during Thursday’s trading session, and, after that day’s closing bell rang, Equifax Inc (NYSE:EFX) announced a major security breach sending a clear message that companies still aren’t doing enough to protect themselves from hackers. All told, 143 million consumers may have had at least some of their financial information exposed to people who would nefariously use it.
The news lit a bullish fire under FEYE stock, not to mention its cybsersecurity rivals like Palo Alto Networks Inc (NYSE:PANW) and Check Point Software Technologies Ltd (NASDAQ:CHKP); a major data breach usually does manage to put these names in the spotlight.
Whatever the case, Morgan Stanley’s upgrade was limited to FireEye, irrespective of the Equifax debacle. Analyst Melissa Franchi explained:
“Early data points from recent results and our customer survey suggest a Helix adoption potential significantly higher than consensus assumes. At the same time, our sum of the parts analysis suggest investors are pricing in continued declines in the FireEye subscription base — stabilization in recent results, positive spending indications from our survey work and a building renewal base all suggest otherwise.”
In other words, investors don’t think FireEye is doing as well as it actually is, setting the stage for at least one pleasant surprise with a future earnings report.
The irony? While the analyst community is essentially lukewarm on FireEye, those very same analysts have still collectively called for appreciable revenue growth and continued progress toward profitability. The graphic of its top and bottom lines — past and projected — tells the story clearly enough.
Not only are investors not adequately pricing in the growth Morgan Stanley sees on the cards, analysts aren’t quite as bullish on the stock despite their own optimism regarding the company’s results. Perhaps Franchi is on to something.
Smart Business Model
The proverbial hang-up for analysts, most likely, is the lack of clear profits thus far. It’s coming though, thanks to FireEye’s relatively new flagship product Helix.
Helix was created shortly after Kevin Mandia took the helm in the middle of last year, replacing Dave DeWalt.
He was certainly no stranger to the business. Mandia was the founder of the cybersecurity company called Mandiant, which FireEye acquired in 2014; it more or less became the organization we know as FireEye today. By November, Mandia had directed the development of a comprehensive cybersecurity solution that was cloud-based and available as a subscription, rather than offered via a one-time purchase.
Such a model is a trade-off. Rather than big but inconsistent revenue wins with high margins, the model lays the groundwork for a lower-margin but more reliable revenue stream. It’s a business plan that affords a company to know how much money is coming in and going out in any given month, allowing that organization to get a grip on its finances — one of the frustrations with FireEye before Mandia took the helm.
The key upside for FireEye? Once a customer is in the fold and has perpetual access to an always-updated cybersecurity suite, they tend to stick around. Each new customer FireEye’s sales team adds translates into more recurring revenue without (necessarily) more expenses. The trick is just achieving enough scale to turn a profit, which most think will start to happen late next year.
Bottom Line for FEYE Stock
While the notion of investing in a stock before that company has proven it can turn a profit may seem outlandish to some, that’s not exactly how the modern market works. It’s the trajectory of a company’s results that largely determines the trajectory of its stock. To that end, Melissa Franchi’s upgrade makes a lot of sense, even if few others see which direction FireEye is headed.
There may be less speculative and more stable names out there, but if you were looking for one last good reason to own FEYE, you just got it.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
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