Is FireEye Inc (FEYE) Stock the Best IT Security Play?
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Comparing FireEye Inc (NASDAQ:FEYE) and Check Point Software Technologies Ltd. (NASDAQ:CHKP) side by side, an investor might wonder which is the better buy: FEYE stock or CHKP stock?
Source: David via Flickr (Modified)
It’s not a trick question.
Relatively speaking, Check Point is clearly a better IT security stock than FireEye. At least that’s the case if we’re talking about profits and losses. But these are two companies at different stages.
In the trailing 12 months, Check Point made $861 million in operating income from $1.8 billion in revenue while FireEye had $360 million in operating losses from $720 million in revenue.
Check Point’s completed its transformation to a recurring-revenue model that began in earnest a couple of years ago; FireEye’s is just getting going, a point InvestorPlace.com’s James Brumley made abundantly clear on July 3:
“As underestimated as FireEye’s new model may be, it will be years before it actually bears enough fruit to pay all of the company’s bills. FEYE stock will surely rise and fall between now and then. If you can stomach the volatility though — and remain well aware that FireEye is still only a trade that is morphing into an investment — you can afford to lean bullishly.”
Revisiting the Value Trap
It’s taken a while for me to come to appreciate the positive aspects of FireEye’s business. As recently as January, I called FEYE stock a “value trap”, suggesting investors take a look at Cyberark Software Ltd (NASDAQ:CYBR), a smaller, Israeli IT security business with solid profits and growing revenues. Since then, CYBR is down more than 16% in the last six months while FEYE is up 17.9% over the same period.
As cyber-security stocks go, I still like CYBR, but that’s a discussion for another day. Right now, I’m trying to help you determine which is the better buy between the large cap (Check Point) and the mid cap (FireEye).
As I said in June, I believe FEYE stock has a good chance of hitting $20 by June 2018. However, to get to $20, it’s got to keep working on cutting expenses while growing the top line at a reasonable pace. To wit: “Candidly, if it wants to make money, that number [overall gross margin] has to jump to 80%; it’s got to boost subscription and services’ quarterly revenue by 20% or more year over year and cut another 10% from its operating expenses,” I wrote. “Then it will start making money.”