FireEye Inc (FEYE): One Stock To Watch

internet etfsJim Bach:  FireEye Inc (NASDAQ:FEYE) jumped 5% yesterday (Wednesday) on rumors that network hardware giant Cisco Systems Inc. (Nasdaq: CSCO) was looking to buy the small cybersecurity company.

And sure enough, when Cisco CEO John Chambers all but put those rumors to rest, FireEye stock fell. By early afternoon today,FireEye Inc. (Nasdaq:FEYE) stock had fallen 3.3%.

The sudden drop in the price shows just where the market values cybersecurity stocks right now.

You see, Wall Street isn’t interested in what the next big cybersecurity solution is going to be.

FireEye stock

Wall Street is only going to be interested in how this nascent, but all-too-important, industry is going to consolidate – and which big tech giant looking to shore up its cybersecurity portfolio will gobble up smaller players like FireEye.

If the market actually valued cybersecurity products and not just M&A opportunity, then FireEye would have been a darling and not a flash in the pan like it was.

Just look at these times FireEye stock failed to rally, despite news of how important cybersecurity is:

  • On Dec. 19, 2013, Target Corp. (NYSE: TGT) confirmed that it was a target of cyberattacks. FireEye stock traded in a narrow range for the next couple weeks to follow.
  • On August 27, 2014, JPMorgan Chase & Co. (NYSE: JPM) was a target. And less than a month later Home Depot Inc. (NYSE: HD) was. FireEye opened October down 19% over the previous two months.

However, FireEye stock did get a big boost at one point since its IPO in September 2013. And that jump has been more telling for the industry than this string of cyberattacks…

Why FireEye Stock Climbed in January 2014

On January 3, 2014, the FireEye stock price soared 28%. In the weeks to follow it traded up at high as $95.63 on March 5.

By this point in the year, FireEye stock was up 119%. It wasn’t because the company unveiled some new cybersecurity innovation that promised to stop hackers.

In fact, the jump really had nothing to do with FireEye’s cybersecurity solutions…

It was all excitement on FireEye’s acquisition of Mandiant, a cybersecurity firm that gained notoriety for exposing the breadth of China’s cyber espionage in 2013.

Sure enough, the excitement wore off. By October 2014, FireEye stock had fallen to $25.76. That’s a 73% drop in the FireEye stock price from its top in January 2014.

The slump followed a big year for cybersecurity M&A, leading up to the FireEye Mandiant purchase. Among the biggest cyber deals of 2013 were Vista Equity Partners LLC buying Websense for $1 billion; Cisco’s $2.7 billion purchase of Sourcefire; and International Business Machines Corp.’s (NYSE: IBM) $1 billion purchase of Trustee.

Wall Street values the consolidation of the cybersecurity industry because, right now, that’s the only tangible development that can be made in this relatively unexplored industry.

Just a decade ago, cybersecurity solutions were confined to basements and garages. They weren’t being as heavily discussed in boardroom presentations. Cybersecurity was a passive operation. Businesses would check off a list to ensure compliance of Sarbanes-Oxley Act provisions as opposed to actively trying to get ahead of growing cybersecurity threats.

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