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FireEye's Future Prospects Bright, But Investors Should Avoid The Stock

Summary

FireEye acquired four companies in the last three years.

Issued nearly $900 million in debt and continues to lose money.

Possible secondary offering, diluting shareholders' equity further.

Founded in 2004, FireEye (NASDAQ:FEYE) has grown exponentially. The importance of security is extremely vital, and the demand for security continues to increase as cyber attacks increase and the world becomes more connected.

In 1988, after four years from the Macintosh introduction, the Internet's first ever worm virus hit the computers. The Morris worm - one of the finest recognized worms to affect the world's nascent cyber infrastructure - changed everything. Bugs in the code caused hundreds of systems to slow down and crash. Computer security was then no longer a science fiction.

Today, it is not just a computer security, but also smartphone security, cloud security, and so on. In short, the Internet is everywhere. As FireEye says:

"Attackers are clever, technology is complex, and experts are in short supply."

FireEye stands out in the global Specialized Threat Analysis and Protection (STAP) market. According to research firm IDC, FireEye had 37.9% of the nearly $1 billion STAP market in 2014, seven times greater than its closest competitor. The $930 million STAP market grew 126.3% from 2013. By the end of 2019, it's expected to reach $3.14 billion, compounded annual growth rate (CAGR) of 27.6% from 2014 to 2019.

From the STAP market alone, FireEye generated $353 million in revenue, a 119.2% growth year over year (Y/Y). The STAP market revenue accounted for a whopping 82.86% of FireEye's total $426 million revenue in 2014. If the company can maintain its 38% of share by 2019, it could be generating about $1.2 billion in revenue from that market alone.

STAP Revenue - 2011-2019 ($M)

While these are great news, there's a disappointment. FireEye's 37.9% share of the market in 2014 declined from 43.1% in 2013 due to a growing competition, notably from Palo Alto Networks (NYSE:PANW).

In April 2014, Palo Alto Networks acquired Israeli cyber security start-up Cyvera for nearly $180 million. In September 2014, it introduced Traps, an endpoint STAP product that was built on the technology from Cyvera.

FireEye itself admits the intense competition it operates in. In its 2015 annual filing, it recognized that "several vendors have either introduced new products or incorporated new features into existing products that compete with our solutions…independent security vendors such as Palo Alto Networks…offer products that claim to perform similar functions to our platform."

In December 2013, FireEye acquired Mandiant, a leading provider of advanced endpoint security products and security incident response management solutions, for approximately $1.02 billion in cash and stock. Mandiant is well known for a...


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