Monday, September 8, 2014

* FireEye (FEYE) - Four Charts Point to Two Opposing Phenomena. Is FEYE Ready to Move?

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FEYE closed at $33.23, up 4.8% with IV30™ up 1.4%. The Symbol Summary is included below.

Provided by Livevol

DISCLOSURE: The hedge fund is short FEYE.

FEYE has four phenomena occurring all at the same time.  Revenue is exploding as is investment in research & development (R&D).  At the same time, gross margins are falling and net income (earnings) are showing parabolic losses.  The stock had risen from $30 to $90, then fell to the $20's and now sits at ~$33. In four charts, we'll see the risk in FEYE, then turn to the option market to see the risk pricing.

The all-time stock chart is included below.

Provided by Yahoo! Finance

Here is remarkable stock swing... a firm up 200% then down 70%.  The question is... where next?  Let's look at the conflicting signals from the fundamental side.

Revenue (TTM)
The picture doesn't get much prettier than that.  The firm now generates over a quarter billion dollars in revenue in the trailing twelve months, up from ~$70 million.

Gross Margin %
One of the most fantastical opportunities in FEYE was (in really still is) the gross margin %.  The company was looking right at 80% margins at one point.  That measure has fallen to 60%, which is rather abrupt, though in all truth, is still a "good" number.  That dramatic drop is cause for concern.

Net Income (Earnings) TTM
Well, this is the ugliest of the bunch.  Losses are expanding rapidly and now sit larger than total revenue (ttm)

So is all hope lost?... maybe, but FEYE certainly doesn't think so.

R&D Expense / Operating Expense
In Q4 2012, FEYE was spending ~$0.13 in research & development out of every $1 in operating expenses. That number is now ~$0.22, which is great than a 50% rise.  FEYE management is pouring money into developing the firm, and if you own the stock, that's your bet along side with management.

Now let's turn to risk pricing in the option market. The IV60™ chart in isolation, below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV60™ looks forward exactly 60 calendar days).

In English, the yellow curve is the risk in future stock price movement.  We can see FEYE is right about in the "middle" relative to its past risk pricing.  It's in a sort of unsettled equilibrium.  The question really becomes, is the risk priced correctly?

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$30.20, $35.80] by the end of trading on Sep. 19th.

The range priced by the options is [$28, $38] by the end of trading on Oct. 17th.

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

Legal Stuff:
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