Why Analysts Are Getting Scared of Cybersecurity Valuations

FireEye Inc. (NASDAQ: FEYE) was absolutely slammed after disappointing guidance with its most recent earnings report. Although it had decent quarterly earnings, investors were looking ahead to the fourth quarter and even beyond. News that the U.S. government was taking on more Chinese hackers, as opposed to the private sector, definitely cut FireEye deep and it was felt in the rest of the industry as well.

This sentiment is reflected across the board in both of the major cybersecurity exchange traded funds: First Trust NASDAQ CEA Cybersecurity ETF (NASDAQ: CIBR) and PureFunds ISE Cyber Security ETF (NYSEMKT: HACK).

As a result of this monumental disappointment, analysts added fuel to the FireEye stock and further pushed it down. Initially after earnings, shares were only down between 10% to 15%. However, once analysts had their say, the stock dropped around 25%.

Merrill Lynch had this to say in its report, after issuing a Neutral rating:

We were positive on FireEye throughout the big share price drop over the last few weeks as we anticipated that its superior technology would help to sustain the strong momentum of the last few quarters. However, weak guidance, execution issues, personnel departures, and EMEA weakness prompt us to downgrade our rating from Buy to Neutral as we think the stock lacks catalysts in the near term, until the new cycles kick in and the growth accelerates. … We have been positive on FireEye, as it’s the first mover in a new market, offering a unique value proposition and significant technology leadership, with potential for total addressable market expansion. The company expanded its product portfolio from 3 to 20 products and currently addresses many different markets. However, we now have a Neutral rating given decelerating growth trends with uncertainty around when to expect a reacceleration.

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Wells Fargo downgraded FireEye to a Market Perform rating with a valuation range of $22 to $25. This downgrade was based on the strength of FireEye’s product and management’s ability to execute long term. The firm sees too many near to medium term issues bringing about uncertainty to growth forecasts.

Wells Fargo further detailed in its report:

The bulk of FEYE’s issues appear to be related to execution – most notably in Europe. However, management also highlighted a more moderate macro environment with less emergency spending. Regardless of the exact reason(s), we think investors will conclude that the company’s issues primarily stem from increased competition and risk to core appliance pricing.

FBR Capital carried a similar sentiment in its report:

We are downgrading shares of FireEye from Outperform to Market Perform. While we (and many on the Street) have been patient during this roller coaster ride over the past 18 months, it appears DeWalt and the FireEye growth story have run into a brick wall as evidenced by the soft 3Q15 performance/4Q15 outlook.

Shares of FireEye were recently trading down more than 23% at $22.24 Thursday morning, with a consensus analyst price target of $47.22 and a 52-week trading range of $22.01 to $55.33.

NASDAQ CEA Cybersecurity ETF shares were trading down 2.5% at $17.86 in its 52-week trading range of $16.02 to $20.84.

Shares of PureFunds ISE Cyber Security ETF were trading down 3.3% at $26.63 within a 52-week trading range of $18.29 to $33.91.

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