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On Friday, analysts at Summit Research Partners wrote a note to clients defending
FireEye following its second quarter results on August 5 and subsequent 11 percent decline the following trading day.
The analyst,
Richard Williams defends several misconceptions which are contributing to the stock's decline.
For starters, the analyst believes that FireEye's product revenue recognition changes that were disclosed with the Mandiant deal has created confusion for investors. The analyst adds that around $20 million is involved per FireEye which is recorded ratably as opposed to upfront before the change. Billings are only reduced by cash expenses therefore the impact on free cash flow is “not large.”
Williams states that FireEye can grow at a higher rate than what is currently expected by analysts. To help fuel growth, the analyst points out that Managed service sales have high margins that are equal to subscriptions. Professional services margins are in between 50 percent and 65 percent due to high demand and the importance of remediation.
Bottom line, Williams believes that FireEye's technology is “well ahead of the pack” while the Mandiant acquisition provides FireEye with a great source of new deals at high margins.
“We believe that FireEye is going to trade back up towards the high-end of group valuations (from parity now at 9.3x EV/Rev) based on its growth rates over the next several quarters,” Williams concludes while adding “the more FireEye declines in valuation, the more we like it on valuation to growth basis.”
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