Is FEYE’s upward trend sustainable?

December 11, 2018

Is FEYE’s upward trend sustainable?

Politics have been putting more pressure than normal on the stock market of late; after the Trump administration announced a preliminary agreement with China to halt imposition of any new tariffs at the beginning of this month following the G20 summit in Buenos Aires, the market seemed poised to rise a new wave of bullish momentum and sentiment. That enthusiasm was immediately dampened this week, however when news broke that Canada had arrested the CFO of Huawei Technologies at the request of the United States for alleged violations of U.S. sanctions on Iran. The market is clearly reading the arrest as a threat to a trade compromise that already seemed tenuous at best. The news has put pressure on entire market, and especially on the tech sector.

While the market has been volatile all year long, and currently remains near to its 52-week low levels, the tech sector was a strong performer for most of the year – at least until the beginning of October. The sector is down about 14.5% since that point as measured by the S&P 500 Technology SPDR (XLK), with almost 4% of that decline coming in just the last week.



One of the stocks that has been bucking the market trend, as well as for the entire sector is FireEye Inc. (FEYE). The company is positioned in an important niche of the sector, which is cybersecurity. The last year or so has seen a lot of well-known companies report major security breaches that have left millions of users exposed, and the negative attention from those reports have been a boon to stocks like FEYE. Cybersecurity is seen not only as an ever-present need, but also one that will likely only continue to grow, since attacks from malware, viruses, and Denial of Service attacks keep getting more and more sophisticated.

FEYE is one of the leaders in this particular niche, and the fact is that they occupy a favored position as one of the earliest viable entrants into this area of business. They’ve really picked up a lot of momentum since late August, surging from around $14.50 to their current level at nearly $20 per share. That’s a jump of more than 36% over that period, performance that is admirable under any kind of market condition, but seems especially impressive given the uncertainty and volatility that has dominated the market over the last few months. The real question at this point, of course is whether that upward is sustainable. A price a little below $20 might seem pretty modest for a mid-cap stock, but in the case of FEYE, it actually looks very overpriced, with fundamentals that make it hard to argue that it should be anywhere near its current levels. Despite the important business niche it fills, I think that this is a stock that represents a very high level of risk under current market conditions.



Fundamental and Value Profile

FireEye, Inc. provides intelligence-based cybersecurity solutions that allow organizations to prepare for, prevent, respond to and remediate cyber-attacks. The Company offers various products, such as Threat Detection and Prevention Solutions, which include network security products (NX and Multi-vector Virtual Execution (MVX) Compute Node Series), e-mail security products (EX Series and e-mail threat prevention cloud (ETP), endpoint security products (HX Series) and content security products (FX Series); security management and orchestration products, which include Central Management System and FireEye Security Orchestrator, and forensics and investigation products, which include Threat Analytics Platform (TAP), Malware Analysis (AX Series) and Enterprise Forensics (PX Series and IA Series). Its Subscription and Services offers Threat Intelligence Subscriptions, Security-as-a-Service Offerings, and Customer Support and Maintenance Services. FEYE’s current market cap is $3.9 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings increased 50%, while sales increased a little over 11.5%. Over the last quarter, earnings improved more than 33%, while sales were up about 4.5%. The company operates with a negative margin profile, since Net Income has been negative over both the last twelve months (-34.7% of Revenues) and the most recent quarter (-23.6%). This is a major sign of weakness, since the company is spending more than they are bringing in.
  • Free Cash Flow: FEYE’s free cash flow is negative, by about -$34.5 million; I read that as a confirmation of the warning sign from the stock’s negative margin profile.
  • Debt to Equity: FEYE has a debt/equity ratio of 1.46. This number has been increasing in each of the last two quarters. Their balance sheet indicates that while operating profits are not adequate to service their debt, they do still have good liquidity, with a little over $1 billion in cash versus about $951 million in long-term debt in the last quarter.
  • Dividend: FEYE does not pay an annual dividend.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for FEYE is only $3.34, and which translates to a Price/Book ratio of 5.91 at the stock’s current price. Their historical average Price/Book ratio is 3.14, which puts a long-term target price at only about $10.50 per share – which means the stock is overvalued right now by more than 46.7%.



Technical Profile

Here’s a look at the stock’s latest technical chart.

 

  • Current Price Action/Trends and Pivots: The stock’s upward trend since August is easy to see, and the stock is just a little below its last 52-week high, which was reached at the end of November a little above $20 per share. The truth is that there is quite a bit of room to keep going up if the market keeps the bullish momentum going; a break above $20.50 could easily push the stock into the $30 to $35 range, which is where the last significant pivot levels sit from historical price action in 2015. It is isn’t impossible for a stock to diverge from the broader trend of the market, or its own industry; but I still think that current market conditions, combined with the lack of real fundamental strength make it hard to justify a forecast that sees the stock push to brand new highs. Current support for the stock is right around $19 per share, and a drop below that support should see the stock test the $17 range in fairly short order. A break below $17 would mark a legitimate reversal of the current upward trend.
  • Near-term Keys: The fact is that the stock doesn’t offer any kind of useful value proposition right now. The strength of the stock’s upward trend since August might tempt you to look for a bullish trading opportunity, but I still believe that is a very low-probability, high-risk trade to try to work with, no matter whether you buy the stock or trying to use call options. Shorting the stock, or buying put options would become an interesting option if the stock breaks down below the $17 range; a drop to $15 or possible even below $14.50 per share is possible.