FEYE Dumpster Fire vs 1 yr PEG

Investment Analysis Clubs Saul’s Investing Discussions
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All-
I never cease to amaze myself. At 51 years old, you would think that I would have learned something in 30 years of investing. But, sometimes, I regress to my 21 year old self. I wouldn’t mind that if it involved more hair and less weight, but for investing that is not so good.

FEYE is a great example of when I make mistakes. As a chemical engineer, I LOVE technology. While I am not a software dude, I do appreciate a network effect and first mover advantage. I thought FEYE meets the bill, but plummeting billings, rapidly decelerating growth: 184% followed by 69% followed by 56% to 48% this quarter leads me to think this is more likely a dumpster fire. I thought FEYE might become a legal requirement for companies who want to manage their liability for insurance reasons. Although it was only a 3.5% initial investment, it was 3.5% poorly spent. It does not take many investments loosing 48% in a quarter to seriously impact one’s portfolio. I actually like drops when the thesis appears to remain in order (e.g. SKX).

One of the things that I like about Saul’s 1 year trailing PEG is that it requires ACTUAL EARNINGS! Following the 1 year trailing PEG discipline does cause you to loose out on the early earnings pop for early stage companies. However, because prices tend to go up more slowly than they drop, a great company has a good chance to end up in the Saul zone. What we actually get is most of the fat part of the middle growth with MUCH reduced risk.

FEYE and ISIS were my only two stocks without steady profits. FEYE is finis.

ISIS is a bit of a different stock because it has a LARGE drug pipeline, a steady stream of positive results, and large, proven pharmaceutical companies that will partner in the marketing of that drug so it is a much different situation. I am still a 5% believer in them, though they are not doing great this year. One could make the argument that I should wait, but the biotech pop is so fast that it you would likely completely miss out if you are not in early.

Will FEYE eventually enter the Saul zone? Maybe. If it does, I will be happy to pick it up. Today, it is slowing while its market is growing and competition is heating up.

We’d all be way better off placing our bets on something like SWKS (my favorite stock), INFN, or SKX which has probably dropped for no reason as Saul has pointed out.

Best,

bulwnkl

PS I hold Saul personally responsible for not saving me from myself ;o)

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bulwnkl

I hold ISIS also. Good trial news usually monthly if not weekly on a 38 drug pipeline. In fact I have not seen one setback in a trial since I have followed it. I am in at the 42s and have been impressed by it’s strength in spite of overall sell off in the drug sector. Good luck to us both.

Rob

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Hi Brian,

I just wanted to add that I work for a small private engineering college. We just hired a new CSO, and he was tasked with building a portfolio of services to better protect our information assets. FireEye was one of the first companies he investigated.

They provide a superior product, with automated log scanning and algorithmic incident response protocols. Really sweet. But damn! They are expensive! And they won’t budge one cent on their pricing.

So, I can see the fortune 500 all buying their services. But penetration into the broader market is likely to be limited, just simply because few smaller business can afford them.

I was investigating whether or not to recommend FireEye to my investment club when I had a talk with my CSO about his experience with the company. Once I saw how they are limiting their market by their inflexible pricing, I dropped my investigation and moved on.

Maybe they will see the error of their ways. I hope so. But for now, even after the precipitous drop, I am not considering buying any of their stock.

Just an FYI…

Tiptree, Fool One guide

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Hi Tiptree, That was a very important first hand observation (maybe second hand, but still). Thanks.
Saul

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@Bulwnkl and Tiptree,

I bought Check Point Software (CHKP) in 2009 at $23.80, and have been happy to hang on to it for over 250% return. Check Point’s threat prevention security software blades are widely recognized in the industry, and Gartner has recognized them as a global leader in their Magic Quadrant reports.

No doubt, your CSO has probably looked at Check Point, but if not you may want to give him a heads-up. I’m not a security officer, but I do work in the software and cloud business, and I know quite a few folks who swear by their products.

As an investment, this little Israeli company doesn’t get anywhere near the publicity that FEYE gets, but it has been a solid and consistent performer with $1.6B in sales, no debt, 42.5% profit margin, 88.4% gross margin, and ROE almost 19%. Compare that to FireEye with sales of $529M, Gross margin at 61%, profit margin at -93%, and ROE of -40%.

CHKP won’t show up on Saul’s screen since they currently sport a 2.12 PEG ratio. Although they might have met the criteria in 2012, which was a bad year, but they’ve been going strong since.

-----
Invest wisely my friends
CMFSoloFool
Ticker Guide: NTGR and OTEX

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I have been in CYBR for a little over a year. It ran up to about $75 and now is at $50. I got in last year in the high $20s so it has been all over the place. Expensive but making money. Lots of growth potential in an industry I believe got ahead of itself in stock price but has great longer term potential.

Htownrich

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Out of all the cyber security stocks there are, FireEye has to be the least Saul like of all of them. It is the most unprofitable with the worst P&L - it loses more money than it takes in revenues (I still can’t understand how that is possible).

The closest to a Saul pick would have been

  1. Checkpoint with a good growth rate (although probably too low for Saul at 9-12%) the best margins in the industry and massively profitable as well as the pure play market leader with a great track record and never bubble valued.

  2. Fortinet - which has one of the best growth rates (40-50%), a complete portfolio of offerings and is safely into profitability, but probably still over valued for its growth although at certain points in time after some dramatic fall backs it has been reasonable value.

  3. Imperva especially after the 2014 drop. Grows ~ 40%, has a great CEO and has been consistently undervalued, although now thanks to stunning price strength has held up well and is growing its profitability well.

  4. Palo Alto has had one of the best growth rates (60-100%) comparable with Fire Eye’s and offered good value a few years back, however it hovers around breakeven and was under the cloud of a lawsuit from CISCO when in value territory.

Saul would never have touched Fire Eye thanks to all of his robust criteria.

CYBR and others are new IPO story stocks - some profitable, growing fast but without 2 years track record to evaluate in cases which I suspect again would not fit with Saul.

Ant

BTW - I hold all of the above from a few years back (in Checkpoint’s case many years) before discovering Saul’s board and am squarely in the money. I am happy with all except Fire Eye.

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FireEye has to be the least Saul like of all of them. It is the most unprofitable with the worst P&L - it loses more money than it takes in revenues (I still can’t understand how that is possible).

Yes, Ant, WPRT was doing that for a while too. If you have $100 million in revenue and have a total of all your expenses of $101 million, you lost $1 million. If they are losing more than their revenue, they have $100 million in revenue, but their total of all their expenses was $201 million or more, so they lost $101 million or more.

Note that doubling their revenue doesn’t come close to overcoming that because if their gross margin is say 40%, they are only taking home $40 million after cost of sales. And they haven’t doubled revenue without hiring more salesmen, installers, secretaries, programmers and all the other operating expenses , telephones, computers, offices, electricity, insurance, etc, etc. Say their net income comes to 20%. So if they started out losing $101 million, adding another hundred million revenue only reduces their loss by 20 million. They’d probably have to quintuple their revenue to break even, not make money, just break even. Not my type of company.

Saul

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Nope I didn’t think so. Much of their core business is software, people (advisory) or very high margin software/hardware combinations at Fire Eye. So their variable cost (people, sales and marketing) is a massive proportion so in order to grow enough to cover their losses they may have to grow 5x as you say and that still may never be enough if they don’t keep a lid on things. As opposed to a capital intensive high fixed cost business which gives growth leverage. With high fixed and low variable all growth subtracts losses from the cost base.

Agreed it isn’t your kind of business or company and I hate the Fire Eye P&L. They have fallen for their own hype, cannot control their cost base and very very exposed. IF and it is a big IF Fire Eye doesn’t become THE dominant market leader then it is going to fall apart.

Ant

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Ant:

The P&L shows that Cost of Revenue, R&D and SG&A are all growing like crazy. No wonder they can’t afford to lower prices which puts them in a death spiral.

http://finance.yahoo.com/q/is?s=FEYE+Income+Statement&an…

Denny Schlesinger

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Yep - it aint pretty. Unless they beat all comers and become the top dog with a network effect and moat I can’t see this story ending well.
Ant

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I agree Anthonyms. CHKP showed up on my screens for years, in fact it was far and away the best and I continue to have quite a large holding. However, despite the tax hit I did reduce it a few months back because the company now finds itself surrounded by competition and I felt I was not knowledgeable enough to know how well it can differentiate itself.

PANW seems to get the market’s vote in the pure-plays. I wonder if a mistake is made in ignoring CSCO and INTC in this field.

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PANW seems to get the market’s vote in the pure-plays. I wonder if a mistake is made in ignoring CSCO and INTC in this field.
I don’t think so. I think they are irrelevant. Certainly Cisco is failing to achieve growth overall and security is irrelevant to Intel. The only way I see them getting back in the game is to acquire a pure play.

Typically I like to hold the best in class leader (checkpoint) and the most promising fastest grower (PANW) in the case of cyber security due to the secular opportunity I hold several others as well although I wouldn’t usually do this.

I did the same in network equipment with Cisco and Infinera (I would have gone for Arista but for the law suit) and in storage EMC and Fusion IO.

Once the old dog fails to maintain growth one has to let go. I held on too long with EMC, I sold out of Cisco but glad to have kept CHKP.

Cheers
Ant

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Certainly Cisco is failing to achieve growth overall and security is irrelevant to Intel. The only way I see them getting back in the game is to acquire a pure play

Cisco is just too big and they did buy a pure play, SourceFire, which my security guy says has gone downhill since the purchase. I think Cisco is sitting on cash at about 40% of stock price, but I don’t think they will ever grow like they used to, way too big.

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Intel owns what used to be McAfee.

My guess would be CSCO is deploying serious funds towards cyber-security (and if they are not, why not?). A one-stop shop would be preferable to pick-'n-mix to most companies. No doubt they would like to grow rapidly in the field by acquisition but that cannot be done when the price is so high.

As so often however, it is probably the military sector which will make the discoveries first.

CHKP has had an edge, I always imagine, because you get that with an existential incentive.

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Fortinet - which has one of the best growth rates (40-50%), a complete portfolio of offerings and is safely into profitability, but probably still over valued for its growth although at certain points in time after some dramatic fall backs it has been reasonable value.

I mentioned this stock previously as a choice in this sector - a small anecdote.

Fortinet has always claimed the fastest security processing throughput which they often refer to.

Today I was client side at a massive corporation. I had expected another vendor given its heritage however when I was given guest wifi login details I was confronted with a Fortinet log in landing page.

Once through, I experienced one of the fastest access rates through internet explorer or accessing my company’s VPN. The difference was noticeable and this is in an emerging market location and it is still faster than being back in my Singapore home office. It certainly performs and I was re-assured.

Ant

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Well it looks like Palto Alto Networks has nicely cleared up the confusion. Nothing to be worried about (except FireEye).

Here’s what PANW managed to achieve.

  • Total revenue for the fiscal first quarter 2016 grew 55 percent year-over-year to a record $297.2 million

  • Non-GAAP net income for the fiscal first quarter 2016 was $31.6 million, or $0.35 per diluted share, compared with non-GAAP net income of $12.8 million, or $0.15 per diluted share

But wait for it…

  • Deferred revenue grew 71 percent-year-over-year to $804.5 million YoY and Billings grew 61 percent for the Q

This looks like the pick in the space now. It is still expensive on a P/E and P/S basis but the growth is amazing and is now hitting the bottom line…

Please note that calendars are off for PANW e.g. Q2 in PANW speak = quarter ending Jan 31st (I know - weird right!)

The PANW track record looks outstanding on standard metrics of revenues, Non-GAAP and EPS progress. It looks even better on Billings and Deferred Revenues although slightly less good on average effective tax rates.

Revs (US$m)
Q1 297.2
Q4 283.9
Q3 234.2
Q2 217.7
Q1 192.3
Q4 178.2
Q3 150.7
Q2 141.1

Non-GAAP net Inc (US$m)
Q1 31.6
Q4 25
Q3 20.5
Q2 16.9
Q1 12.8
Q4 9.1
Q3 8.7
Q2 7.8

Non-GAAP net inc EPS ($)
Q1 0.35
Q4 0.28
Q3 0.23
Q2 0.19
Q1 0.15
Q4 0.11
Q3 0.11
Q2 0.10

These numbers are Quarterly not TTM. Maybe someone could be kind enough to load them into that calculator thingy on the interweb that was built for 1YPEG calculations and curvaturisations.

Cheers
Ant

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