FireEye Is Digging Its Own Grave

FireEye (FEYE) has always been a potential acquisition target, and the company even received several bids earlier this year. However, none of those bids materialized as FireEye’s management were demanding an offer of $30 a share, which would have valued the company at over $5 billion.

Given that the company’s management rejected these offers recently, I don’t think investors should continue betting on a buyout as the company’s recent results greatly reduced the chances of it getting acquired.

In the latest reported quarter, not only did FireEye miss the estimates on revenue and billings, which is always disastrous for a growth stock, but the company also announced a plan to reduce its workforce that would lead to a cost benefit of $20 million.

A growth stock laying off employees and looking for ways to cut costs is never a good sign.
Moreover, with FireEye’s revenue only having grown 18% on a year over year basis, it will be very difficult for FireEye to sustain this valuation. Moreover, the slowdown in growth will also put off potential suitors. FireEye is losing money at a rapid pace and the only reason why any company would have been interested in buying it was its strong growth in a potentially huge market.

However, it seems like FireEye’s growth fell considerably and the trend will likely continue since it is looking for ways to cut costs already. Hence, I would suggest investors not to bet on a potential acquisition, not unless the management greatly reduces its expectation.

There is no way FireEye’s valuation should be anywhere close to $5 billion and after the recent quarter, the company’s management will have to reduce their asking price massively for it to get acquired. Although it is a good thing that FireEye is working to improve its bottom-line, there is no excuse for the lack of strong growth.

The cyber security market is expected to grow massively in the coming years, and FireEye’s lack of growth is a cause of concern for investors.

Conclusion

I had recently penned down an article explaining why FireEye rejecting an acquisition bid was a mistake. In my opinion, the company should have taken the money when it had the chance to. However, after the recent results, FireEye’s valuation will be reduced greatly. Certainly, no company would be willing to pay $30 a share for FireEye. Thus, I would suggest investors to continue avoiding the stock going forward.

Disclosure: No position
Published on Aug 8, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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