UBS highlights 4 main observations following its recent round of checks within FireEye Inc.'s (NASDAQ:FEYE) ecosystem: partner tone tilting more stable than anticipated; refresh less vulnerable to displacement than feared; cautious optimism on new Helix offering; and jury still out on share gain potential in the (hyper-competitive) endpoint segment. FEYE is leaning on 3 pillars of growth in 2H – refresh/upsell success, endpoint adoption, and Helix uptake – and based on UBS' field work, easier comps, forthcoming public-sector quarter, and resurgence of widely publicized global cyberattacks (positive for services), implied 2H growth of +1-3% looks reasonably attainable. Yet, these reassuring factors are tempered by the firm's lower conviction on an imminent HX/Helix-driven product cycle, risk of price concessionary renewal activity, and its belief that go-to-market mechanics likely still need to mature to prove 1Q's improved execution is indeed a trend. The firm await more consistent cash flow conversion to increase valuation support, and seek faster narrowing of losses to become more constructive on the stock.
Underlying sentiment has improved off the bottom and since the promising 1Q17 results, though remains broadly negative (short interest 20% of float). At 3.4x EV/S '18E expectations are arguably low but UBS thinks valuation is fair given high-single digit topline growth and restrained earnings and cash flow generation relative to peers. Current risk/reward is balanced, in UBS' view, and it is relative buyers of FTNT (3.1x, teens revs growth).
High-end consulting has been critical to FEYE's tech roadmap and distribution, and increased support for 3rd party tools suggests emphasis on services is likely to continue. In this regard, a relative valuation exercise vs. SCWX, IT services peers, and Optiv's takeout multiples supports the firm's view that FEYE shares appear fairly valued at current levels.
The firm increases its price target to $16 on 3.5x EV/S on UBSe in 5-8 Qs. Raised multiple on more stable NT outlook and CY17 UBSe at high-end of guide, as reinforced by UBS' checks; CY18+ below St on slower growth re-accel. UBS thinks stock warrants discount to peers (4.4x median) and FEYE's 3-yr median (3.9x) on inconsistent execution, low cash flow support, loss profile.