Cyber security is seen as both the one of greatest threats and largest opportunities of the digital age. If you aren’t employing someone like digitaldefense.com, then I’m afraid you’re behind the times and very vulnerable. High profile hackings both private companies such as Target (TGT) and Sony to government spying (Angela Merkel’s cell phone!) finally reaching the worldwide stage as President Obama hosted the cyber summit at Stanford in February.
That coincided with the earning’s releases from the top publicly traded cyber security companies such CyberArk (CYBR) Palo Alto Networks (PANW) and FireEye (FEYE) and each delivered better than expected results. The confluence of public awareness with a tangible business prospects help catapult the shares of each up some 30% in the month of February.
While PANW and CYBR remain near all-time highs, shares of FireEye, which was the first to go public back in early 2013, are still off some 55% from their 2014 peak of $96 a share. But I expect FireEye shares to start out performing.
Cyber security will remain a big story throughout 2015. The power of publicity was back on display last Friday as FireEye shares jumped over 5.5% to $43.30 on word it and its CEO would be featured on 60 Minutes. Indeed they were. And indeed come Monday morning the stock was greeted with a “sell the news” response for giving back nearly all the gains over the next two days. All this over people rushing to join an online security firm to protect them from attack.
But at this point shares have held the new important support level at the 20 and 50 dma after that igniting candle. I think this offers a good entry point for building a bullish position.
From a fundamental standpoint FireEye is expected to grow revenues by 45% to $620 million in 2015. It, and the rest of the sector’s growth, is being fueled by increased IT spending across most industries, especially financial and telecommunication firms. Spending on software and digital security is expected to double over the next two years to an estimated $40 billion.
But FireEye is still far from profitable and is expected to post a loss of $0.50 a share for this quarter when it reports on April 30th. There was also an unwelcomed secondary last year in which insiders unloaded shares near the highs that left investors feeling misled by management. This may help explain the nearly 22% of the float which is sold short. Of course such a high short interest can actually become a bullish catalyst as it represents embedded buyers and leaves the stock vulnerable to a squeeze.
I am keeping this simple with a straightforward purchase of calls. Specifically;
I’m buying September $45 calls for $4.00 a contract.
This provides a sufficiently long time horizon for my $60 price target to be reached. Even though this a relatively low cost call if one wants to further manage risk consider using a stop loss of a close below $37 for exiting position to reduce potential loss.
— Steve Smith