Issue #18: The go-to cybersecurity firm for the US Government and profiting from crypto mania 🚨
Let's get into this week’s report. Here’s what we found:
- A cybersecurity company that has the US Government and 40 Fortune 500 companies as clients.
- An undervalued cryptocurrency exchange that grew its net income by 24x.
FireEye, Inc. ($FEYE)
$21.73 - Share price at time of writing
- FireEye has been the first call for government agencies and companies around the world who have been hacked by the most sophisticated attackers.
- FEYE's product set may not be cutting edge, but their security consulting and incident response services, are the finest that money can buy.
- FEYE is set to grow its revenue as demand for its services will surge from governments and corporations around the world looking to prepare and respond to cyberattacks.
- Sentiment, not earnings, is likely to drive additional gains for FEYE.
What they do:
FireEye uses tools — with the permission of a client company or government agency — to look for vulnerabilities in their systems.
FireEye also generates revenue from identifying the culprits in some of the world’s biggest cybersecurity breaches — its clients have included Sony and Equifax.
In December 2020 its own systems were pierced by what it called “a nation with top-tier offensive capabilities.”
The company said hackers used “novel techniques” to make off with its own tool kit, which could be useful in mounting new attacks around the world.
Surprisingly, since the news of FireEye's breach, its stock price has gone up by around 42%.
Investors believe the breach worked in FireEye's favor for two reasons:
1. After the breach FireEye now has unique insider knowledge and insights on how cutting-edge attacks are executed.
2. As cyberattacks continue to become a serious concern for private and government organizations, demand for FireEye's top-tier consulting services will grow.
Why they’re spiking in interest:
According to MarketStream.io, the total Reddit mentions of FireEye has increased by roughly 406% in May compared to the total mentions in April.
The growth in mentions was likely driven by a recent spike in major cyberattacks in the US.
Colonial Pipeline was forced to shut down its networks after a Russian cybercrime hacking group launched a cyberattack. The FBI also identified ransomware attacks targeting US healthcare and law enforcement agencies.
FireEye is well-positioned to benefit from these events as demand for its consulting services will grow.
Notable comments from Reddit:
"I am eyeballing FireEye (FEYE) because they got the contract to help out Colonial" - se7en41
"FireEye has the best incidence response for cyberattacks in the USA and were contracted heavily during the SolarWinds attack tens to hundreds of companies last quarter." - 9Jon72
Why FEYE could be valuable:
FEYE is actively enhancing its product portfolio – management is not only adding incremental capabilities to existing solutions but also launching new products.
Examples include integrated data streaming from endpoint agents, remediation and response functionality in Helix, asset-based alert correlation, and email queue management for assessing and implementing email security directly from the Helix platform.
FEYE also rolled out its SaaS platform, Mandiant Advantage, to customers late last year.
According to FEYE's site, Mandiant Advantage "automates our expertise and intelligence into your environment."
Here are factors that will continue to make Mandiant unique:
- 40 of Fortune 100 companies are customers
- 900+ analysts and researchers
- 200,000 breach response hours per year
- Strategic partnership with Microsoft
- Mandiant managed consulting was recognized in The Forrester Wave: Managed Detection And Response, Q1 2021 report
FEYE's Q1 2021 results were strong. Some of the highlights included:
- Revenue for the quarter came in at $246m (+10% YoY)
- Mandiant Advantage, cloud subscription and managed services segment grew by 26%. This segment now represents 35% of revenue and 55% of total ARR (annual recurring revenue).
- The professional services segment also recorded 20%+ growth.
- Improved billings from platform and professional services.
- FY21 guidance increased to $1010M-$1030M (previous guidance at $990-$1010M) on the back of revenue growth.
The future looks bright for FEYE.
Its network security business is stabilizing. Cost optimization initiatives have been above expectations. Its cloud security continues to deliver, and FireEye's key competitive differences in forensic, incident response and threat intelligence remain solid. The margins trend points toward more expansion. Cash flow management has improved.
It's worth noting that the FEYE stock price currently seems to be driven by the news cycle and its involvement with the recent spike in high-profile cyberattacks.
The market expects big contract wins to follow and assumes that earnings will scale accordingly.
What the risks are:
The main risks for FireEye include slow subscription revenue growth, execution risks (mostly related to Mandiant Advantage) and debt load.
Competition has also been heating up from vulnerability management players like Rapid7 and Qualys who are evolving their SecOps capabilities. Network security players like Palo Alto Networks are also improving their endpoint solutions as a way to play in the SecOps space.
Coinbase Global, Inc. ($COIN)
$242.41 - Share price at time of writing
- Coinbase is the largest cryptocurrency exchange in the United States, it's also one of the biggest exchanges in the world.
- Coinbase is growing, profitable, and is priced reasonably after the pullback it has seen.
- The mission of Coinbase is to create an open financial system and is building what it calls the "Cryptoeconomy."
- The company should not be valued purely on Bitcoin's performance.
What they do:
Coinbase is a financial technology company that provides infrastructure for the crypto economy. It operates a platform where cryptocurrencies can be traded, stored, spent, and earned for both individuals and institutions.
Coinbase has more than 56 million verified users on its platform, across more than 100 countries. It integrates with more than 15 blockchain protocols and supports more than 90 cryptocurrencies.
The primary cryptocurrencies on the platform are Bitcoin and Ethereum by a significant margin.
Transaction fees currently drive the business (more than 80% of revenue). Coinbase generated annual revenues of $1.27 billion and is expected to rapidly accelerate this in 2021.
Why they’re spiking in interest:
According to MarketStream.io, the total Reddit mentions of $COIN since its IPO is roughly 7,500 mentions. Approximately 80% of its mentions were generated in May 2021.
Mentions of $COIN were closely correlated with the recent flood of cryptocurrency coverage in mainstream media. Elon Musk, dogecoin, Bitcoin and the recent crypto sell-off would all likely have contributed to discussions of Coinbase not just on Reddit but across the Internet.
Notable comments from Reddit:
"COIN stock price going up and down based on crypto volatility is irrational. Regardless of buying and selling, Coinbase will collect fees." - hhh888hhhh
"Investors should ride through volatility in the crypto space by buying shares of Coinbase, according to Goldman Sachs." - megacurl
💸Signal: Cathie Wood's ETFs ARKK, ARKW and ARKF have been accumulating shares in Coinbase. In total, the firm has approximately $1 billion worth of shares in $COIN. Source - benzinga.com
Why COIN could be valuable:
Cryptocurrencies have made their way out of a small, nerdy niche and into the mainstream.
The combined market value of all cryptocurrencies is more than $2 trillion which is about as much as the market capitalization of Apple.
Traders speculate on price movements in the crypto market, and hype around cryptos like Dogecoin only increases interest.
Coinbase is almost perfectly positioned to profit from the rise of crypto. Coinbase makes money when people trade, regardless of whether traders make a profit or not.
Institutions - hedge funds, corporations, insurance companies, pension funds - are becoming more and more interested in crypto assets as prices surge. Institutional assets are also responsible for Coinbase’s total asset growth as institutions have been making larger capital allocations to crypto assets to get in on the action.
Coinbase is already highly profitable despite large investments in its platform and growing marketing expenses. Coinbase’s net income was $771m in the first quarter of 2021, 24x times the amount it earned a year ago.
More than 80% of its revenue from transaction fees, but Coinbase intends to diversify its business over the coming years. There are growing aspects of the business that could contribute to its revenue over time.
These include Coinbase Earn, as well as potential crypto-banking features such as debit cards, staking (users storing crypto assets in exchange for yield), and portfolio-backed lending.
If institutions continue to adopt cryptocurrencies, Coinbase would also see an increase in custodial fees, as well as the opportunity to build out and supply infrastructure for managing cryptocurrencies. Coinbase hopes to bring these value-add services to a 50/50 split with transaction fees over the long term.
With cryptocurrency still in its infancy as well as all the boom and bust cycles that come along with it, it seems the market wants Coinbase to prove itself before giving it a premium valuation. As of right now, the average analyst price target is $388.92, suggesting an upside of nearly 75% from its current price.
What the risks are:
The biggest risk for cryptocurrencies and Coinbase is that governments get involved and limit accessibility.
Chinese regulators are cracking down on financial institutions and are warning against offering crypto-related services. Chinese government action was also one of the factors behind the steep decline in crypto prices recently.
Government interference poses a threat to adoption and can lower interest in cryptocurrencies over time. It is likely regulations are going to increase, rather than decrease, as cryptocurrencies become more popular.