What FireEye Might Fetch in a Buyout, and a Reality Check

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The world continues to be in dire need of solid data security and cybersecurity options. Whether this pertains to security for individuals, corporations or government agencies, the need to protect data and keep intruders out is stronger than ever. This has represented a huge opportunity for companies that can capitalize on the opportunity.

FireEye Inc. (NASDAQ: FEYE) has been well known in the world of cybersecurity, but the company has not been without some controversy from investors. There might be at least some excitement after reports this week that the cybersecurity company is said to be working with Goldman Sachs to explore a potential sale of the company.

As with any company with market chatter, this has to be treated no better than a rumor. To validate or refute such a rumor it is imperative to figure out if another company would actually buy FireEye and what that price might be.

FireEye has seen its shares of disappointments in recent years. It just is not as simple as saying “But now it’s a buyout candidate.” The company has continued to grow, with revenues rising from $623 million in 2015 to $831 million in 2018. Where the issue of “what it’s worth” comes into play is that FireEye has a long history of operating losses and is not profitable on a net basis. It also has seen negative net free cash flows through 2018, and Wall Street is currently targeting revenue growth of close to 5% in 2019 and 8% in 2020. Its current profits are only on a non-GAAP basis, and the earnings forecasts for $0.02 per share in 2019 and $0.17 per share for 2020 make for nosebleed valuations on top of what are real versus virtual earnings.

Through the end of 2018, FireEye has amassed a net loss carryforward amount of about $2.35 billion since it began operations. That is about 78% of the company’s current market cap. The balance sheet also listed as almost $1.4 billion in goodwill and intangible assets combined on its balance sheet, along with about $872 million in long-term debt as of June 30, 2016. On the bright side, it most recently had almost $1 billion in cash and investments, followed by $127 million in receivables and it still has deferred revenues and backlog to consider.

FireEye does have a lot to offer a would-be buyer. It offers threat detection and threat prevention solutions for an entire network, email security solutions, endpoint security and customer support and maintenance services. And having a $3 billion market capitalization would not make this an astronomical buyout for any large company. Integrating the company into another organization may be an entirely different story, and the price tag for a company with limited prospects of major growth has to be considered.

One problem that the investing public has that is common among those who need and want to buy more cybersecurity is that the field is rather crowded. 24/7 Wall St. has 14 go-to cybersecurity stocks that all have a market capitalization of $1 billion or higher. A combined valuation for these 14 players was about $125 billion on last look, and close to half of these companies are operating with a loss or barely a break-even basis on every new sale that is made.

Companies such as IBM, Intel, Cisco, Dell, HP, Oracle, Salesforce.com, Microsoft and so on have made many acquisitions over time. They all have specific needs that are very different from each other. There are literally more than a dozen other companies that could have a theoretical interest as well. Private equity firms, particularly those that cherish earnings and an ability to offer consistent cash flows and dividends, would most likely not be a fit.

It turns out that the daily flow of analyst calls included FireEye and many cybersecurity rivals. Some of those leaders were started with Buy ratings, but SunTrust Robinson Humphrey started FireEye with a Hold rating and a $15 target price (versus a $13.82 prior close, after a 4.5% gain). That’s not a very aggressive target.

UBS issued a more favorable outlook. Its sum-of-the-parts analysis comes to a $22 per share price target. That would imply more than 50% in upside if it is correct.

Other analysts have mixed views on the value of FireEye. A CFRA report from late September came with only a Hold rating and a $17 target price. Nomura/Instinet started FireEye with a Buy rating and a $16 target price back in early August, but that was days after BMO Capital Markets maintained its Market Perform rating and trimmed its target to $16 from $17. On the last day of July, Wedbush Securities maintained its Neutral rating and lowered its target to $15 from $17.

Shares of FireEye were up almost 1% at $13.95 in midday trading on Thursday, and that’s after a 4.5% gain on Wednesday. The shares have a 52-week trading range of $12.66 to $20.61, and they have been stuck mostly between $13 and $18 since the start of 2018.

It remains to be seen if FireEye really is a good buyout candidate. It also remains elusive as to what a real buyout price might be. The Refinitiv consensus analyst target price was last seen at $17.66.


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