FireEye (FEYE) is deemed the hottest security stock of 2015. It IPOed on Sep2013 and the stock has been on a bumpy ride ever since.
With the internet of things taking over the world, cyber security is deemed to be one of the big themes that would benefit from these mega-trends. The more connected we are, the more we are at risk from hackers and cyber-terrorists. So when I found out that someone in my value investment group would be presenting FireEye, I ignored all pending work and rushed down to the venue to listen to the presentation. One of the reasons I am so interested is because I get to hear a perspective from the presenter who happens to be an industry insider. I prefer listening to industry insiders than analysts sitting at their desks making fancy projections. The other reason I am interested in this company is because I am restructuring my portfolio and I am trying to pick dominant growth companies that can benefit from mega-trends.
So how hot is FireEye?
Some of the Data Provided by Eugene, blogger from Temasek.org. Thanks Eugene!
To summarize the presentation:
Founded in 2004 by Ashar Aziz (vice-chairman of the board)
Market Capitalization: US$6.29B
Current price: US$44.27/share
Price/Sale: 14.8x (we are using P/S ratio because the company is not profitable at the moment)
– Revenue grew by an astounding 150% y-o-y in Q4 2014.
– 41% of revenue came by subscription service. 90% of customers renew their subscription.
– Total Addressable Market (TAM) ~ $30billion
FireEye currently has technology more advanced than other competitors in the cyber security industry. It makes use of this product, known as the MVX device to detect threats in systems. As malware can take root in a system without detection and only show damaging effects many months later, the MVX counters this by creating virtual machines that when affected, speeds up the process of infection and gets it to show the side-effects in the virtual machine itself, rendering the actual system unharmed. Using this strategy, threats are detected and updated in real time. Traditional systems used by competitors can only scan for known threats and must undergo updates to receive new data.
As if that is not enough, FireEye also takes advantage of the network effect by a Dynamic Threat Intelligence cloud in which a customer can receive access by paying subscription fees. Every new customer adds data points to the cloud, so that whenever new threats are detected, or a system is under attack, MVX machines all over the world will be notified and updated. More customers=More data points=More information shared between MVX machines= More value!
This could explain their highly-risky hyper-growth strategy to acquire more customers, build up data points in the cloud, increase the switching costs for the customer and at the same time, form an economic moat in this highly-competitive industry that deals with an enemy that can constantly change and adapt. As their competitors race to create this technology, FireEye is taking a no-holds barred, aggressive growth approach that is burning cash so fast like it’s Seventh Month already.
It is led by David Dewalt, the CEO that led McAfee to be acquired by Intel for $7.7B. David Dewalt apparently rejected 40 job offers after leaving McAfee, only to join FireEye, as he wanted to grow a young company and not just run a big one that only goes around swallowing (acquiring) up little ones.
Watch out for the risks!
A hot stock like this that has sick revenue growth also comes with a nosebleed cash-burn rate.
While revenue grew from $88,253M to $178,246M (2013 to 2014), Operating loss has also been increased steeply from $172,218M to $479,195M. It’s net cash flow is also deeper in negative territory at -$131,270M from -$69,762M the previous year.
The CEO has said that the cash burn rate would moderate, and that the company doesn’t expect to be in the positive cashflow territory for the next 2-4 years. Employees have also increased from 175 in 2011 to 2,418 in 2014, but Glassdoor ratings for the CEO and the company remain high.
One must also watch out for the shares dilution which has been increasing over the past 2 years. The more shares outstanding, the lower the value of your current shareholdings.
Verdict on FireEye (FEYE)
FireEye seems like it is going all out, guns-blazing, trying to dominate the market at all costs. Although I believe in its revolutionary technology, it seems like its only time before its competitors or hackers come up with something new. Of course I may be wrong, FireEye can still adapt and change with the market conditions. In fact, it may even succeed in building such a strong network effect that it’s customers can never be stolen by its competitors.
But the lack of positive cashflow, increasing shares-outstanding, losses, fast expansion, are very big risks which anyone with half-a-brain cannot ignore.
If I had some money to spare, I would probably bet a little on it. But, I feel this is one stock which you could lose 99% of your capital or get a blue-sky multi-bagger. If you want to invest, make a bet like a venture capitalist.
Identifying mega-trends isn’t enough, one must still decide if the company is poised to survive and grow in the many years to come.
So what do you think of FireEye? Go big or go bust? (I do not own any shares of FireEye at this point of writing.)
So, hyper-aggressive growth stocks are not your thing? Prefer steady, dividend-spewing plodders? There are still some key traits to identify and a strategy to follow. Learn from my friends at the Fifth Person. They are straight-up, legit professional investors who will mentor you along your investing journey. Learn more about their Dividend Machines course by clicking the image below.