EUR 850.00 For Business Accounts Only

Morningstar | FireEye Moving Toward Being a Primary Vendor Via Its Cloud-based Security Platform; Keeping $15 FVE

FireEye sells network, endpoint, and email security solutions and is a renowned provider of cybersecurity services for breach remediation and security posture assessments. Its Mandiant consulting brand has leading-edge threat intelligence and is called into many high-profile breaches. On the product front, FireEye is shifting toward being a primary vendor via cloud-delivered solutions with a platform approach from previously selling appliances that were used as backstops. While FireEye's pivot should provide growth and margin expansion, other leading competitors' holistic security platforms and spry best-of-breed upstarts could affect FireEye's growth trajectory. We are maintaining our $15 per share fair value estimate for no-moat FireEye. With shares trading near our fair value, we would instead recommend narrow-moat Palo Alto Networks as a cybersecurity investment.

We believe FireEye is making strides in the right direction through its Helix platform, which consolidates security for FireEye and other vendors' products, and expertise on-demand, which give customers immediate access to FireEye experts remotely. We think the vast creation of data plus the increased usage of software-as-a-service applications and cloud-based ecosystems will drive up the quantity and complexity of cyber threats. We believe that security teams prefer consolidated security platforms, like Helix, to manage multiple defense touch points. While FireEye's platform does not have the breadth of its rivals, we find value in FireEye offering its leading services with its subscriptions. FireEye's security experts stay ahead of threat trends via in-depth research; we believe those insights show up in new FireEye subscriptions and create a unique value proposition. With a lack of security talent in the market, we expect firms to increasingly use external threat assessments, like FireEye's red teams, while growing their reliance on outsourced security experts when teams are overwhelmed.

We model FireEye producing an 8% five-year revenue CAGR as it gains momentum with cloud-based subscriptions and managed services. In our view, FireEye's appliance-related sales will continue to decrease as consumers favor cloud subscriptions for a variety of threat protection technologies. Over the next five years, we model cloud subscriptions and managed services to grow at a CAGR of 28%, professional services to expand by a CAGR of 6%, and for products and related subscriptions and support to decline by a CAGR of 6%.

As FireEye shifts from physical products to cloud subscriptions and managed services, we model consolidated GAAP gross margins to expand to 69% in 2023 compared with 67% in 2018 (non-GAAP gross margins growing to 78% in 2023 from 76% in 2018). We expect prudent low-single-digit annual increases in development and sales and marketing, combined with the pace of revenue growth, to expand GAAP operating margin beyond 1% in 2023 versus the 22% loss in 2018 (non-GAAP operating margin increasing to 26% versus 22% in 2018). Going down to the GAAP net income line, we expect 2024 to become FireEye's first profitable year compared with the $243 million loss seen in 2018.