FireEye Is My Must-Buy Stock to Start 2018

 | Jan 03, 2018 | 10:00 AM EST
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I looked at a lot of small biotech stocks as possible 'must buy' stocks for 2018. There are several I think could easily double in the New Year; albeit with the high risk developmental concerns in this space always entail. However, my must buy stock to open 2018 is a technology stock. The shares seem undervalued at current trading levels with little downside risk. I also think the company is bought by a larger suitor with a 50% to 75% premium sometime in 2018. Therefore, FireEye (FEYE)  is the stock I think Real Money Pro readers need to own going into the New Year.

This California-based company provides cybersecurity products designed to detect and prevent attacks as well as enable rapid discovery and response when a breach occurs. Cyberattacks and cybersecurity have become part and parcel of everyday life. The breach of Equifax (EFX)  in early 2017 affected over 100 million consumers and cost its shareholders over $2 billion. Spending on cybersecurity is expected to exceed $1 trillion for the five-year period from 2017 to 2021.

FireEye generates revenues through sales of its software appliance products, subscriptions, and services. Customers who purchase FireEye products are required to buy subscriptions to threat intelligence and support, which are typically priced as a percentage of the appliance price in one or three year subscriptions, with the revenue recognized ratably. Subscriptions and services make up the bulk of FireEye's revenues. Revenues from all products and services soared from $11.8 million in 2010 to $714.1 million in 2016, a compounded annual growth rate of nearly 100% per annum.

The company did not handle that growth as well as it could have and as a result, about a year and a half ago, brought in Kevin R. Mandia, a brilliant CEO in my opinion. Under new leadership the company has relentlessly moved to the 'cloud' as it transitions from having disparate products to offering a single platform.

FireEye recently launched FireEye Helix cyber security platform, a cloud-based solution that improves customers' resiliency to attacks by providing a view of the customer's "attack surface", alerting the customer of the nature of the threat -- including the attacker's identity, tools, and techniques -- as well as providing a pre-determined response based on the type of cyberthreat. This offering combines its cloud-based network and endpoint detection capabilities, contextual threat intelligence, threat analytics, and orchestration capabilities with a unified cloud-based console. In short, a comprehensive solution. Initial feedback from customers has been encouraging.

The company has consistently beat bottom line quarterly earnings estimates since new leadership took hold. The stock is priced at under 3.5 forward sales. Competitor Palo Alto Networks  (PANW)  goes for five times forward revenues. Given how fast this niche of the market is growing, it is ripe for acquisitions by suitors looking to gain or add to a footprint in this market.

Recently, a rumor surfaced that Action Alerts PLUS charity portfolio holdingMicrosoft (MSFT) was interested in FireEye. I think it is more likely the eventual suitor is Cisco Systems (CSCO)  or IBM Corp. (IBM)  . That makes FireEye a must own name in the New Year.

This commentary originally appeared on Real Money Pro on Jan.2. Click here to learn about this dynamic market information service for active traders.

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