Expanding profit margins
FireEye (FEYE) is not yet GAAP-profitable. Though the company has managed to improve its net margin from -104% in 2014 to -29.3% in 2018, it’s likely to improve to -12.5% by 2021.
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So every $1 dollar rise in sales will increase FireEye’s operating profit by $14. The company’s EPS are expected to grow at a more-than-impressive compound annual growth rate of 114% over the next five years.
Earlier this year, J.P. Morgan (JPM) upgraded FireEye shares as the investment bank was optimistic about the company’s improving margins.
Strong balance sheet
FireEye has a debt balance of $962.6 million while its cash stands at $1.12 billion, which means FireEye can easily repay its debt and interest obligations. The company generated operating cash flow of $17 million, indicating an operating cash to total debt ratio of just 1.8%. The company can easily cover its short-term obligations as it has a current ratio of 2.04x.
Investors are banking on FireEye to improve profit margins and grow billings with a shift to software services. However, sales growth in single digits and a market growing at a robust pace might mean more questions than answers. FireEye might also have to increase its debt to fund its operations, which could bring its margins under pressure.