MorningWord 9/23/15: Fire in the Hole – $FEYE

by Dan September 23, 2015 9:08 am • Commentary

Cyber security software vendor FireEye (FEYE) has had a fairly controversial run as a publicly traded company.  Since its September 2013 IPO at $20, the stock is up nearly 80% vs the S&P 500 up 18% and the Nasdaq Composite up 30%.  But the current out-performance only tells part of the story, as the stock rose nearly 150% at one point in early 2014, before crashing 75% in the ensuing months:

FEYE IPO through Dec 2014 chart from Bloomberg
FEYE IPO through Dec 2014 chart from Bloomberg

During that run up the company (and some management personally) sold stock to investors (14 million shares at $82) in the form of a secondary offering, raising $1.1 billion in March 2014.  The deal worked for a few hours (see circle above) but marked an epic top. In hindsight the stock sale was fairly brilliant as the company now has a very nice cash cushion on their balance sheet that could be of critical importance if the company can not stem the massive earnings losses (despite expected year over year sales growth of 50%, the company has guided to annual losses in 2015 of $1.75, down only 12% from last year’s loss of $1.97).

Back to the chart, in December 2014, in the wake of Sony hiring the company to help manage their epic hack, the stock awoke from its long dirtnap (circled in green) which set in place a near 100% rally from its Dec lows to its recent June highs:

FEYE 1yr chart from Bloomberg
FEYE 1yr chart from Bloomberg

The stock is once again at a fairly critical inflection point, have retraced much of 2015’s move. And now its 50 day moving average is about to cross below its 200 day, and about to break a key support level at $35 with no support till $30.

If this market correction gets worse, stocks like FEYE will get disproportionately killed. It’s just that simple. Already decelerating sales growth will likely stall further (if the market correction is a pre-cursor to a slowing economy), losses will accelerate and there will be absolutely no valuation support. Make no mistake, cyber security companies like FEYE are going to be around for a long time. Many will be bought, merged or possibly turn into the next Adobe with a $40 billion market cap, but there stock prices and valuations will not merely grow to the sky.

It’s important to remember that FEYE’s CEO David De Walt sold his former cybersecurity outfit, McAfee in 2010, the number two internet security company by revenues to Intel (INTC) for $7.7 billion!  This deal at the time didn’t appear to make a ton of sense for INTC, at almost 4x trailing sales of $2 billion, but it was a home run for DeWalt and shareholders.

Thinking about Mcafee for a second, it appears that the division has not been run too well inside of INTC.  In 2014, the Software & Services Group (page 13 of 10k), of which Mcafee is a part, was 4% of their $55 billion in annual sales. Not all of that is McAfee, which means the business has not grown in revenue terms since it was acquired.

Recently I had a friend suggest to me that INTC should spin out the group given the valuations of stocks like FEYE and (PANW) Palo Alto Networks (8 and 11x sales respectively).  But maybe private equity takes a stab at Mcafee and merges it with a company like FEYE. Then, all the sudden, you have a quick path to profitability, a management that knows the company and product well and a formidable global player in what will be one of the strongest secular moves in enterprise computing in decades.  That’s obviously pie in the sky sort of stuff, but here is a good example of the price action and the technical set up getting me to look at a stock and get the wheels in motion in my head going on potential outcomes.

The stock is probably not worth a look on the long side until it has a 2 handle. That’s my quick and dirty technical and fundamental take.