Is FireEye Turning Into a Top Cybersecurity Stock?

FireEye (NASDAQ: FEYE) has given investors mixed signals over the last few months about where its business is headed as the lack of decent top-line growth has led many to wonder if the company is competitive enough to cut its teeth in the thriving cybersecurity industry.

But investors have been hopeful of a turnaround, as the year-to-date rally in FireEye stock shows us.

FEYE Chart

Data by YCharts.

The company's second-quarter results have given bulls another confidence boost as the cybersecurity specialist outperformed expectations, and the guidance was also better than expected. So is FireEye indeed a top cybersecurity stock that investors should consider buying?

Abstract cybersecurity shield

Image source: Getty Images

FireEye hasn't stepped on the gas just yet

Second-quarter revenue growth of 6% was not all that impressive when compared to some of its peers. And management's third-quarter guidance calls for $227 million in revenue at the midpoint, which would be essentially flat with the prior-year period.

This indicates that FireEye's rally has more to do with the company beating expectations. Even the full-year revenue estimate of $905 million to $925 million would translate into just 3% growth at the midpoint over 2019.

The lack of growth is concerning as FireEye carries the most expensive earnings multiple among its peers.

FEYE PE Ratio (Forward) Chart

Data by YCharts.

As such, the company will have to step up its growth rate to justify the valuation. But a closer look at recent trends indicates that FireEye isn't making much progress on that front.

Investors shouldn't miss these points of concern

FireEye has been transitioning its business from a product-driven model to a subscription-based one that focuses on cloud security. This explains why the company's revenue growth has not been as attractive as its peers'.

In the second quarter, revenue from FireEye's on-premise product and related subscriptions was down 12% year over year. The slowdown in this business was offset to a large extent by the growth in FireEye's platform, cloud subscription, and managed services businesses. Revenue from this segment was up nearly 30% year over year to $73.5 million. Professional services revenue also increased close to 21% year over year to $52.6 million.

However, these two businesses account for just over half of the top line, which is why their impressive growth was drowned out by the slowdown in the product-related business. But the problem is that even the platform, cloud subscriptions, and managed services segment may be losing steam as annual recurring revenue growth trends downward:

Chart showing slowing growth of FireEye's cloud business.

Image source: FireEye. ARR=Annualized recurring revenue.Y/Y=Year over year

That's not surprising as FireEye has witnessed a decline in the pace of its customer and transaction growth. The company added 223 new customers during the second quarter, down both sequentially and year over year. The number of transactions greater than $1 million also fell from 45 a year ago to 39 in the second quarter.

FireEye's deferred revenue wasn't anything to write home about, either. The metric decreased 2.2% year over year to $893 million thanks to a sharp decline of 11.1%% in product-related deferred revenue. Platform and cloud-related deferred revenue, however, increased 10.7% year over year to $289 million.

The legacy product business is still weighing the company down. That might not change as soon as investors hope, given that business still accounts for a significant portion of FireEye's total revenue, which is why investors are likely better off looking to other cybersecurity stocks that are doing a better job of tapping into the end-market opportunity.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Palo Alto Networks. The Motley Fool recommends Fortinet. The Motley Fool has a disclosure policy.

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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