In a year of very hot initial public offerings, grabbing a headline is difficult, but getting the lead billing on Forbes, Reuters and a host of other stock market and industry websites is much harder. The sizzling debut of FireEye (FEYE) did it with ease. Being one of the top 10 biggest floats of the year after the opening day will do that for a stock, as will a slew of impressive IPO numbers.
The debut price for FireEye was initially slated to be $15, before a revision up to $17. However, even that price proved too conservative, with the eventual $20 listing price raising over $304 million when it hit the boards of the NASDAQ for the first time. During the opening day of trading in the stock on September 20, it became clear that even the 25% spike in the initial price was to prove conservative, with intraday highs of $44, above 100% of the initial listing price, before an eventual close at the $36 mark. The trading in the stock since has largely locked in those first day gains, with the most recent traded price as of Friday, December 6th, 2013 was $36.59.
So does FireEye have the necessary kindling and foundation to become the powerhouse of the sector, or is high stock price an indication of a story with too much fuel and not enough substance? The following will take apart the business model, the earnings figures and the forward outlook to answer this question.
Understanding the Business
The premise of FireEye’s offering is relatively simple to understand. Companies like Norton Antivirus and McAfee (later acquired by Intel Corporation) pioneered web-based security against online threats by essentially giving their users armor to protect themselves with. However, as the Internet has grown and proliferated much of what these first wave security companies have been able to offer in terms of protection has become outdated, with the threats now firing bullets rather than arrows.
In response, there has been a second wave of companies that seek to address this deficiency in web protection. First wave companies relied on a software installation on a computer to protect against viruses that were contained typically in emails and other personal communications. However, the evolution of the Internet to contain more and more personal information and transact more business has created far more targets to hone in on for more complex malicious attacks via hackers and viruses. To develop “Kevlar” protection against these bullets FireEye and it’s competitors develop software and hardware tie-ups that stop so called zero day attacks, which are able to exploit weaknesses in software that have not been ironed out by the developer. FireEye’s premier model does this by finding suspicious code, rather than waiting for an intrusion attempt or detecting an already in place virus and by quarantining suspicious emails and opening them to weed out threats.
So is this innovative strategy paying off in terms of revenue and profit?
Metrics and Measures
The answer is yes and no. The IPO story for FireEye (FEYE) had some impressive numbers to back it up, with first half revenue in 2012 a strong $29.7 million, with exceptional growth to more than double that in the first half of 2013 with $61.6 million of revenue booked. This growth was all the more impressive because the company has yet to hit it’s tenth birthday, with the founder, Ashar Aziz, beginning the stellar trajectory in the company in 2004.
However, the glossy revenue figures and impressive growth rate are well and truly put into perspective by the profit numbers. FireEye has yet to notch a single quarter of profit since inception in 2004. While this not unusual for an early stage tech company, further red flags are raised when looking at the profit and loss statement, where the losses have widened fourfold from $14.3 million in first half 2012 to a budget breaking 67.2 million in the corresponding period in 2013. This means that instead of being invested in growing the company to make it profitable, over 20% of the windfall from the IPO will be spent getting the company back to breakeven point.
The financials paint a sobering picture, however there are also compelling reasons to invest in the company.
The Investment Case
The FireEye business model relies on more customers buying their suite of products to supplement their existing firewalls to protect their emails, networks and servers from cyber attacks from malware and other viruses to make money.
In their favor is the ever-growing proliferation of the Internet into every facet of modern life, which is driving more and more companies online in their quests to attract and retain customers and business. Even non-customer facing companies now do much of their work online, as do multinational corporations and conglomerates. Every one of these companies requires the security of taking every precaution within reason to protect those transactions and information, as not doing so would be like leaving a car unlocked in a bad neighborhood. Therefore the addressable market is growing for the company.
Also in FireEye’s (FEYE) corner are some industry heavy hitters including former CEO of McAfee security David Dewalt. There are also plans to utilize the funds raised from the IPO to recruit more staff in order to further develop and refine the product offering. Encouragingly the founder of the company has also got a large stake in the success of the business, retaining a 9.3% overall stake.
However, the attractiveness of the market means that there is strong competition for customers, with Palo Alto Networks and Sourcefire, backed by Cisco, two examples of strong rivals.
Investing in FireEye (FEYE) is an investment in an area of growth, with the need for sophisticated web security more pertinent than ever with the ever-growing power of hackers and viruses to circumvent traditional defenses. However, a company like FireEye indirectly sells peace of mind, so a lot depends on the integrity of their products to deliver the security they promise, as any serious breach could be fatal to the prospects of the company, especially given their weak financial position. The success of FireEye is dependent on the company’s management recruiting well and focusing that talent on building and marketing strong products in order to generate organic business growth and a maiden profit to justify the strong share price rise of recent months.