Should You Follow Nomura's Advice Ahead of FireEye's Lock-Up Expiration?
FireEye shares soared nearly 4% on Monday after Nomura reiterated its buy rating, ahead of a large lock-up expiration that will allow insiders and institutions to sell millions of shares. FireEye shares have fallen from a high of nearly $100 to just shy of $30 since early March, partially due to heavy selling in momentum stocks and also in preparation of this expiration. Investors are likely thinking that FireEye could follow Zulily's lead, but just remember, Twitter's expiration is more likely.
What to expect during lock-up expiration
After a 30% post-earnings collapse, investors were very skeptical of how e-commerce company Zulily would trade when nearly 90% of its outstanding shares became eligible for sale. Instead of losses, and almost unprecedentedly, it jumped nearly 10% on May 14, suggesting that insiders and institutions decided to hold their shares. Consequently, its high short ratio became a friend to longs, as short-covering likely created the pop.
With that said, Nomura is taking a pretty gutsy, perhaps foolish, stand by reiterating its buy rating on FireEye just two days ahead of an enormous lockup expiration, where nearly 70% of the company's shares will be available for sale. It's no surprise that, with Zulily's lockup reaction being so recent, investors could almost forget what seems like common sense, following the introduction of significantly more sellers than buyers, with that being likely stock losses.
Perhaps the best example of what to expect from FireEye can be seen with Twitter. Earlier this month, nearly 85% of its shares outstanding were available for sale, and on that day, the company lost 18% of its valuation, followed by another 5% the day after. Therefore, with similar lockup expirations -- Zulily's was actually the largest -- how can investors anticipate FireEye's reaction?
Common sense dictates lockup reaction
With all investments, those who own shares available to sell during lockup expirations ponder one question: Is the investment appropriately valued to sell? FireEye shares have lost nearly 65% from post-IPO highs. Both Zulily and Twitter had similar trading patterns prior to expirations. However, valuation, not price performance, is key to determining the reaction.
For example, looking at today's multiples for Twitter, FireEye, and Zulily, all of which are off 52-week lows, we can identify a clear trend for what might be occurring in the mind's of those with shares to sell.
Expected 2014 Revenue Growth
As you can see, Zulily has the slowest expected growth rate, but also trades at just one-quarter of the premium of its peers relative to sales, and is the only company of the three that's profitable. Moreover, 72.6% growth is extremely bullish, especially considering that the company is earning profits in the process.
As a result, it's quite easy to understand why early investors saw their holdings as undervalued, or not fully appreciated, and chose not to sell. In the meantime, FireEye may have the most impressive growth, but much of that performance is from acquisitions, not organic growth, and the company's spending of $1.18 in operating costs for every $1 it earns in revenue. Therefore, investors have to ponder whether growth is sustainable, given this excessive spending.
With all things considered, FireEye, despite its losses, is not a cheap stock. Much like Twitter, it trades at a gaudy multiple and operates with large losses, essentially buying business. Therefore, it's reasonable to suggest that early investors will notice this fact, and be more than willing to take profits in a company that's priced well. As for Zulily, it remains cheap, it's growing fast, and profits are definitely an added bonus, all of which explain why its share price rose, and why FireEye's is likely to fall on May 21.
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The article Should You Follow Nomura's Advice Ahead of FireEye's Lock-Up Expiration? originally appeared on Fool.com.Brian Nichols owns shares of ZU. The Motley Fool recommends TWTR. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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