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FireEye Inc (FEYE) Needs Someone to Buy Its Sandbox

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Computer security should be easy money. Everyone needs it, and that need grows every year.

FEYE Stock: 3 Reasons FireEye Inc (FEYE) Stock Still Looks Like A Winner

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Serving the need is not that simple, though. High-end computer security is a complex, fast-changing business. If your approach is popular, investors will come running. But, once that changes, it's hard to get them back.

FireEye Inc (NASDAQ: FEYE ) is known for its "sandbox" approach , sold as the Multi-Vector Virtual Execution (MVX) system. Think of MVX as one of those boxes soldiers put suspected bombs into. It executes and analyzes suspicious software, and this is supposed to be a $3.5 billion business in 2019.

It might be. But, in terms of profit, it may also be a dry hole.

Where Is the Profit?

FireEye has not delivered the results its hype led people to expect.

Revenue has grown, but expenses have grown just as fast, and in 2016 revenue growth slowed. For the first three quarters of 2016, FireEye had revenue of about $530 million and was on pace to beat last year's $632 million, but it wasn't enough to beat expenses, $297.76 million having been spent on $186.41 million in third-quarter revenue alone.

There is a "flavor of the month" quality to these stocks, based on their differing approaches to the subject of security . They go into fashion, but then go out of fashion.

FireEye was very much in vogue in 2014, but it has lost 60% of its value since the start of 2015. Palo Alto Networks Inc (NYSE: PANW ) and its "next generation firewall" was the choice in 2015, but it's down 16% since the start of 2016. Fortinet Inc (NASDAQ: FTNT ) and its "security fabric" was last year's choice, and while all three of these stocks are up so far in 2017, that may not last.

Part of the problem is that, while start-ups rushed into computer security early in this decade, because mainstream vendors weren't offering what the market wanted, those vendors are now on the case. While their products are not up to scratch, their promises - and profits in other areas - are enough to keep investors happy.

Intel Corporation (NASDAQ: INTC ), International Business Machines Corp. (NYSE: IBM ) and Cisco Systems, Inc. (NASDAQ: CSCO ) had all announced that computer security was a focus of their efforts in the last year, and all are up. The specialty firms, however, are down.

Solutions Remain Elusive

A real solution to the computer security problem remains elusive. This can lead to analysts clutching at straws, lost amid the hype.

The bullish case is "nuanced," our James Brumley notes. InvestorPlace 's Josh Enomoto says it's this year or never for FEYE stock. Our Will Ashworth says there are better plays out there such as Cyberark Software Ltd (NASDAQ: CYBR ), which has maintained profitability as it has grown.

That's true, but Cyberark hasn't grown, much. The Israeli company had revenue of $160 million in 2016 and $103 million in 2015. That's a small fraction of FireEye's take, and FEYE is still considered a minnow in this field. But, profit is the flavor of this month.

The Bottom Line

FireEye has a niche, yet management still hasn't found a way to generate profit on that niche, so FEYE keeps investing in hopes of a breakthrough.

The company could earn a profit for that niche if it could get its administration and selling expenses down. Lately it has been making some progress on that, but at the expense of slower growth.

The solution seems simple: sell out to one of the majors. FireEye's sales and losses would be lost inside the books of a larger rival, and those administrative expenses would practically disappear if a larger company took over.

That, to me, is the only reason for you to buy FireEye today - hope for a buyout tomorrow. A deal would probably draw speculation in the buyer, and at this point the premium to FEYE stock owners would not be enormous.

Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud , available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn . As of this writing he owned shares in INTC.

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The post FireEye Inc (FEYE) Needs Someone to Buy Its Sandbox appeared first on InvestorPlace .

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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