Ignore the Cyber Security Hype and Dump FireEye

After struggling for most parts of 2015 and the beginning of 2016, it seems likes shares of cyber security company FireEye (FEYE) may have finally stabilized. Although FireEye is down about 18% for the year, the company has performed nicely over the last few days and may have bottomed.

Given the strong growth in the cyber security industry, investors may be tempted to buy into FireEye. However, I think investors should be cautious about investing in FireEye as the company’s future prospects are still vague.

2016 guidance and negative margin

With time, cybercrimes are increasing rapidly.
Due to the rising breaches, cyber security has become an increasingly significant issue that large firms have to address as they endure to develop mobile applications and new platforms. In 2015, hackers were able to steal information from large firms such as Target and Home Depot. As a consequence, cyber security plays an important role for large companies, and in place of developing a cyber security department within a company, most would choose to appoint a third-party cyber security company.

FireEye’s major concern is that it carries on reporting negative operating margins. On top of these results, the company lingers to make acquisitions that question the sustainability of the prevailing business. At present, FireEye’s value is slightly more than $2 billion, but this year’s guidance looks depressing for any stockholders holding on from early 2014.

FireEye guided 2016 billings in the range of $975 million to $1,055 million, an increment of just $175 million as compared to previous year. The organic billing growth remains only $110 million excluding the $60 million from the acquisitions. At the same time, the company also detailed that operating expense will remain comparatively flat this year, but operating margin is still considerably negative.

Apart from this, with organic growth decelerating, FireEye has a more challenging path to success. In terms of cash flow, the company is at least directed towards a conceivable situation of producing somewhat positive free cash flow. The company is likely to produce around $30 million of free cash flow in 2016.

Until FireEye is closer to overcome the negative margins barrier and demonstrating that the cyber security expert does not require acquisitions to develop, FireEye is not a long-term investment.

Conclusion

FireEye’s negative gross margin is a headwind for long-term investors. Until the company manages make its business sustainable in the long-run, I think investors should hold off investing in the stock. Thus, I think FireEye, as of now, is not a good investment. However, given that the company's shares are beaten-down, traders can still consider buying the stock for a short period of time.
Published on Mar 1, 2016
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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