Cybersecurity firm isn’t earning profit; don’t buy
Source: Malcolm Berko
Dear Mr. Berko: My stockbroker had me buy 200 shares of FireEye at $63 in April 2014. We sold it for a 20-point loss the following month. In August 2015, on his recommendation, I bought 300 shares of it at $44. We sold those shares in October at $33. FireEye now trades at $17. At this price, do you think the third time could be the charm? I’ll buy 800 shares if you think so.
— M.L., Rochester, Minn.
Dear M.L.: Two years ago when our family doctor asked whether I’d heard of FireEye, I thought he was referring to an ophthalmological disease. He quickly disabused me of that notion. He said FireEye (FEYE-$17) is in the cybersecurity business and designs slick algorithms and programs that detect, analyze and resolve cyberattacks.
FEYE came public at $20 in the summer of 2013, with revenues of $162 million and losses of $170 million. It immediately began trading in the low $40s, giving it a market capitalization of $6 billion and proving that it’s impossible to overestimate the cupidity and stupidity of American investors.
The following year, FEYE put $435 million in revenues on the books and reported losses of $470 million, while management burned through its IPO cash hoard. In May 2014, with generous fluff and hype, a secondary offering of 5.6 million shares at $82 raised $460 million. Ten days later, CEO Ashar Aziz, Silicon Valley’s newest billionaire, sold 1.1 million shares at $82, pocketing nearly $100 million. And a week later, with high-sounding expectations, management raised an additional $600 million with a convertible bond offering. Investors were in awe of FEYE’s market success. FEYE had no earnings and no earnings in sight, yet it had a breathtaking market cap of more than $12 billion. Panic-stricken investors were frantically buying the stock, fearing that they might otherwise miss another Google or Facebook. Two weeks later, everything collapsed, and FEYE was trading in the mid-$40s.
Last year, FEYE’s management reported revenues of $625 million and losses of more than $500 million. How lovely! And this year, management says FEYE will record $950 million in revenues and losses in the neighborhood of $600 million. Wonderful! And you really want to buy FEYE again? My dad used to say, “When you’re dead, you don’t know you’re dead. It’s only difficult for others.” I think it’s the same way when you’re stupid.
FEYE management has the cybertools but doesn’t have the business sense to earn a profit. FEYE is purported to have some of the most sophisticated, innovative and effective vector-specific appliance solutions that provide threat protection from network to endpoint for inbound and outbound network traffic containing sensitive information. Its impressive content management system provides cross-enterprise threat data correlation across multiple vectors that identify and respond to threats and attacks with real-time intelligence. This is a huge business and is growing quickly. FEYE has 3,400 employees, with offices in Africa, the Asia-Pacific region and the Middle East.
However, this is not an investment; rather, it’s an abominable and mephitic speculation.
The company is run by nerds, polymaths and eggheads rather than professionals who understand balance sheets and income statements.
But at $17, some observers say that FEYE is a smart speculation. Cisco (CSCO-$29.80), which has made several acquisitions to address next-generation firewall and threat prevention, is looking. Some say that CSCO, with more than $60 billion in cash and an expected 2016 net income of $12.2 billion, is a potential FEYE suitor in the mid-$20-per-share range.
There are numerous synergies that CSCO has identified, and stripping out a lot of really unnecessary expenses and costs would make FEYE an attractive merger candidate.
I’m also told IBM wants to beef up its cybersecurity offerings and may be a suitor. A merger is probably necessary because FEYE’s inutile management lacks the business skills to run this company profitably.
There’s some doubt that FEYE’s board would let the company go at a price that is so near the bottom of its two-year range as a public company. If another loss wouldn’t bother you, then go for it.
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