Sunburst Fosters A Comeback For FireEye

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FireEye, Inc. (FEYE) was regarded as a tech stock that fizzled out in the years since its IPO back in 2013. FireEye went public in 2013 at an IPO price of $20 and soared to $80s before major concerns were raised regarding its ability to raise substantial profits which propelled to question the valuation and fundamentals which resulted in the stock plummeting way below its initial price of $20 and hovered in the range of just above half the value of the IPO price during for nearly 2 years between 2016 and 2018.  

SolarWinds hack lifts FireEye stock

On December 13, federal agencies witnessed one of the most devastating cyber-attacks in U.S. history. FireEye was no exception to the cyber-attack and turned out to be a victim to the ubiquitous network-monitoring software from SolarWinds Inc. Initially the stock plunged by 13% with the disclosure regarding FireEye’s exposure to the cyber attack. The backdoored software is now recognized as “Sunburst”. Yet, on December 18, FEYE stock closed after surging 34% to a record high at $19.23 from its previous close of $14.38, recording FEYE’s second-best single-day gain of all time.  

Source: YCharts

Sunburst renders a relook at budget 2021

The breach of security is inevitably expected to increase cybersecurity spending by government agencies and companies alike. It is believed that over 18,000 businesses were vulnerable to the attack including high-tech giants such as Microsoft Corporation (MSFT) who declared their network security had been breached. The extent of damage caused to high profile government and private institutions has preceded companies to revisit their cybersecurity budgets for 2021.

The cyberattack came in at a pivotal point in time when companies were setting budgets for the new year. FireEye did take on a major blow by initially reaching out and admitting to falling into the cyber threat pitfall, but the company solidified its presence by being a first respondent to the hack. For businesses to know exactly what information was sought by the hackers after initial entry calls for a major investigation and the skills required to obtain such information are available with FireEye. The quick response can be used as a marketing effort and this will help FireEye emerge as a clear leader in the investigation of Sunburst cybersecurity attack and detection and prevention of future cyber-attacks.

66% capital gain for FEYE stock but true gains are far from realized

The stock extended on the prospect of FireEye gaining due to its nature of business in the cybersecurity industry, yet the benefits are not that clear-cut. The bullish sentiment led by investors drove FEYE stock to a 66% capital appreciation owing to the quick response to the attack thus beating out other cybersecurity companies. However, FireEye is associated as a network security solution and is regarded as an auxiliary piece to existing network security.

FireEye has taken strides toward being recognized as a primary threat defense mechanism through its Helix platform which is a unified security operations platform. While demand for FireEye’s services will ensue, we believe cybersecurity players with well recognized holistic platforms will have an edge over FireEye in the medium term, which leads us to believe the company’s profitability will not improve as much as expected by the market in the short to medium term. Investing in equities, however, should be a long-term oriented exercise.

FireEye shines at Mandiant Solutions

FireEye’s Helix platform may not have the magnitude of its rivals, but FireEye does stand out in its expertise in quick detection and rapid response to a breach of imminent threat. FireEye may not bode well to take on the competition at an all-inclusive platform level but can level the playing field by thriving at Mandiant consulting services.

The below is an excerpt from the company website:

 “Mandiant Solutions is a portfolio of cybersecurity solutions that enables organizations to measure, optimize, and continuously improve security programs. The Mandiant team applies decades of frontline experience with an understanding of emerging global threat actors so you can manage overall cybersecurity risk.”   

Since cybersecurity is of utmost importance, we believe this may create a unique advantage for FireEye to garner new subscriptions and substantially boost topline growth. Amidst a lack of threat identification skills within internal security teams deployed by organizations, firms will have no other choice but to resort to experts such as FireEye.

Competition steepens the stakes

Larger cybersecurity players will catch on and integrate similar auxiliary services as product offerings and customers will be more inclined to adopt the new additions rather than working with multiple vendors. FireEye has grasped the concept that customers prefer all-inclusive service providers and is aiming to drive traffic towards its Helix platform. Despite the efforts, FireEye has some mileage to cover in wider portfolio offerings for cybersecurity solutions considering the complexity and advancement of products provided by competitors.

FireEye is a frontrunner in Mandiant services where customers require incidental reports after a particular network has been breached or an assessment on the organization’s security portfolio and improvements to be made regarding anti threat coverage. FireEye does have on-call expertise in this area and will be in demand for their services in the foreseeable future.  

Breakeven by 2023?

FireEye is an unprofitable business but has managed to reduce company losses at an average rate of 15% per year over the last 5 years. FireEye’s third-quarter revenue increased by 6% YoY to a record $238Mn owing to the rise in transaction activities and growth in its cloud and services business. The improvement in the product mix can be clearly seen with the 31% spike in revenue witnessed from the platform, cloud subscription, and managed services segment in comparison to 27% in the previous comparative quarter. Professional services revenue increased by 18% YoY as well, but, FireEye still gets 46% of revenue from the product-related business.

Commenting on the recent developments and financial performance,  CEO Kevin Mandia said:

 “There is an escalation of activity in cyberspace that’s negative right now. There’s an increase — it’s either an increase in attacks or an increase in the impact of these attacks that are keeping us busy and probably many factors that are contributing to them.”

FireEye’s balance sheet remains strong with over $1 billion in cash and cash equivalents and short-term investments. Analysts have forecasted FireEye to have sufficient liquidity to easily cover its investments in the next few years and remain solvent considering the positive free cash flow profile. The free cash flow grew by 50.9% in the last year helped by the company’s strategy of not distributing any income to shareholders at the moment as investing money back in the business seems to be the best course of action for now.   

Takeaway

FireEye certainly appears to be on its way for a turnaround with a better and improved product mix that has resulted in an increase in customer engagement. FireEye’s transition to services and subscription-based model from a product-driven model seems to positively impact the company. In the wake of an increase in cyber-attacks, FireEye is well-positioned to drive demand towards its product offerings. With the improvement in its customer base and product mix, we can expect FireEye to keep up the momentum and the stock seems to have more legs to hit new highs in the coming years.

Disclosure: The author does not own any shares mentioned in this article.

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