Playing With FireEye

By Malcolm Berko

July 20, 2016 5 min read

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. — ML, Rochester, Minn.

Dear ML: 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 all kinds of 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. So 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 over $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 over $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.

Management has the cyber tools 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 believe 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 believe that CSCO, with over $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. However, 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.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

Photo credit: U.S. Department of Agriculture

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