Is FireEye About To Get Burned - Real Time Insight

Later this week, FireEye ( FEYE ) is going to see about 92 million shares that were locked up become available for sale. The stock is currently a Zacks Rank #4 (Sell), but let's take a look at what happened with Twitter ( TWTR ) and its lock up and take a look at the similarities.

First a little background on FEYE. The company makes security software for businesses. The real time need for protection is huge as cyber attacks are just going to increase. FEYE is best know for its virtual machines based security platform.

Going Public

Going back a little further, the company filed for an initial public offering on August 2, 2013. In a super fast run to cash in, investment bankers were able to take the company public in just 48 days. This does not make FEYE a bad stock, but it certainly doesn't help the cause either.

The company was floated as a 14M share deal priced between $12-$14. The deal saw the range increased to $15-$17 and the number of shares increased to 15.175M. The deal priced tat $20 and the stock opened for trading at $40.30.

Post IPO

Without getting too deep into the story, I thought I would let the chart tell me the story of FEYE. So here is part of the story.

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This chart tells me the hype in this stock didn't really happen in 2013. The entire move to $100 happened in 2014. So what caused it?

Mandiant Acquired

On January 2, 2014 FireEye acquired Mandiant, a private security software firm for $1.05B in cash and stock. Mandiant was best known for unveiling a secretive Chinese military unit believed to be behind a series of hacking attacks on US companies.

Mandiant was profitable and generating sales of more than $100M according the CEO of FireEye. Payment was in the form of 21.5M shares and options that were valued at $939M when the stock was $43.69. There was also a payment of $106.5M in cash to the shareholders of Mandiant.

Mandiant had raised approximately $70M in venture funding from Kleiner Perkins, One Equity and JP Morgan.

The price to sales multiple for this deal was roughly 10x, and in line with the Cisco Systems buyout of SourceFire when they paid $2.7B.

At the time of the acquisition, the company also increased revenue guidance from $52M-$54M to $55M-$57M. The stock soared 23% in after hours and closed the up 38.6% in the session following the announcement.

Upon the closing of the merger FEYE CEO DeWalt received aggregate merger consideration of approximately $28.6 million, consisting of approximately $3.9 million in cash and 601,439 shares of our common stock, of which 87,335 shares were deposited into a third-party escrow account as partial security for the indemnity obligations of Mandiant and its former stockholders.

Secondary Offerings, That's Right Offerings is Plural

On February 2, the company initiated a secondary offering. The initial filing called for $700M, and by the time it was priced at $82 for 14M shares, the company total take was $1.148B. Of the stock sold in that offering, 7.6M shares were sold by the company, and 8.4M were sold by insiders.

The largest shareholder of FEYE, Sequoia Capital, did not sell any of their 21.6M shares in the offering. Norwest Venture Partners sold just a hair over 2M shares. The second largest seller in the offering was Ashar Aziz, Vice Chairman of the Board, Chief Technology Officer and Chief Strategy Officer, selling 1.04M shares leaving him with 9.7M shares after the offering. David DeWalt, the CEO of FEYE sold 485K shares and held 4.7M shares after the offering.

As the stock slid from its highs, the company held another secondary offering. April 22, just days after a competitor warned that earnings would not be as good as expected the filing hit.

This secondary was for 13.28M shares, and the company received no benefit from this offering. The sellers for this offering included One Equity with 4.3M shares and Kevin Mandia selling 2.5M shares or about 83% of his holdings. If the name sounds familiar in this story, it should. Kevin Mandia is the founder of Mandiant, the company that FEYE purchased for about $1B.

Earnings & Guidance

There have only been three earnings reports for FEYE. The first one was contained a lot of "noise" as it had plenty of one time events that were associated with the company going public. The company posted a loss smaller than the broader Wall Street consensus but due to how Zacks treats options expenses, we recorded it as a miss.

It was at the this time the company initiated guidance of $52M-$54M, which was later raised at the time of the acquisition.

The next earnings release was February 11, and the company beat the Zacks Consensus Estimate for earnings and revenue. That is all fine and good, but guidance came in super light. The expected loss range for the year was increased and the next quarter revenue number was guided below the consensus. The stock fell 10% in the session following the release.

Chart Attack

This is a good time to look at the chart to see that while the Feb 11 earnings release send the stock down 10%, there was still plenty of buyers behind this stock.

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May Earnings Release

By the time the company was reporting again in May, the stock had fallen by about 62% from its March 5 high. The company met the broader Wall Street expectations, but due to options treatment, Zacks has it as a large miss.

It wasn't the report of the past, but more the guidance for the future that sent the stock tumbling more than 28% the next day.

The company increased the expected loss for the year and the next quarter. The midpoint of the new expected loss is the top end of the guided range from the previous quarter. Probably even more concerning to investors was that the company guided to a much bigger loss in the coming quarter.

The consensus was calling for a loss of $0.51, but the new guidance called for a loss in the range of $0.63 - $0.58. Revenue was guided higher, so the implication is that margins are moving the wrong way.

Analyst Day

With the stock falling, management decided to hold and analyst day to allow covering analysts a chance to dig a little deeper into the story.

The stock popped by 9% as the company noted that they would release 8 new SKU's in the coming months.

The Lock Up

On May 21, approximately 92M shares will come off of an IPO selling restriction called the lockup. With shares down substantially from their highs, it is reasonable to believe that a fair amount of shares will be sold.

Rick Sherlund of Nomura noted in a recent report that 42M shares from VC board members and 19M from management. Brent Thill of UBS notes that about 29M is at risk of coming to the market, and that is well above the 5M share average trading volume.

While digging through some filings I saw that Ashar Aziz has a roughly $10M loan from Goldman Sachs Bank which matures at the earliest 10 days after the IPO lockup.

The lockup has been keeping the stock in the news as traders make bets that the increased supply may put pressure on the stock price. Other traders believe that shares have bottom and the company has lined up a number of large institutions to absorb the shares.

One Last Idea Before Our Discussion

I saw wide variety of answers for "percentage of float sold short" so I went to the source. NASDAQ lists FEYE as having 7.2M shares sold short as of April 30.

This means that short interest as a percentage of shares outstanding is 5%, while the short interest as a percentage of the float is 5.9%

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Now that we are all up to speed with FEYE, the question has to be asked. Is the lockup going to sink the stock or will an institution step in and save the day?

Later today I will post in the comments section so data about other lockups, so chime in with your thoughts on this one!

Full Disclosure: I am long puts of FEYE.

Brian Bolan is the Aggressive Growth Stock Strategist for He is also the Editor in charge of the Zacks Home Run Investor service

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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