UBS Global Research published an investment report on IT security software vendor FireEye Inc (NASDAQ:FEYE) on May 6th. Analysts Brent Thill and Reid Menge highlight a strong bull case for future growth at FireEye, but point out that 96 million insider shares “unlock” as of May 21, and this is very likely to pressure the stock for some period of time.

FireEye in sweet spot

Thill and Menge argue FireEye Inc (NASDAQ:FEYE) is in a sweet spot in terms of future growth. “Demand for FEYE is fueled by three of the most powerful secular trends in software: 1) unprecedented growth in cyberattacks, 2) increasing sophistication of the threats, and 3) vendor consolidation by IT buyers.”

They point out that the rapid growth in cyber threats and the increasing sophistication of hacking attacks is driving strong demand for network security solutions. The UBS analysts argue the aging technologies of the leading IT security vendors have made them “ripe for displacement”. Thill and Menge say that over the long run, FireEye Inc (NASDAQ:FEYE) is positioned to disrupt the traditional security vendor landscape and claim a large share of the $20B/year IT security market.

FireEye balance sheet

Lockup expiration

The overhang of a 96 million share insider lockup expiration is the fly in the ointment according to the UBS report. However, Thill and Menge point out that the lockup expiration might not result in as many shares hitting the market as many analysts anticipate.

Of the 96 million shares, 19 million are held by FireEye Inc (NASDAQ:FEYE) executives execs, and firm’s CEO/COO and CFO have publicly stated that they do not plan to sell any shares at this time. Furthermore, FEYE limits the amount execs can sell per year.

Another 42 million are held by venture capitalists on the BoD with similar insider selling restrictions, with just 29 million shares held by early shareholders not subject to trading restrictions. These shares are obviously most at risk of coming to market. Given an average volume of just five million shares/day in , it might take some time for the share price to stabilize if a significant portion of this group chooses to sell.

FireEye rated Neutral

UBS Currently rates FireEye Inc (NASDAQ:FEYE) as Neutral with a price target of $40. The stock is down around $9 today, trading around $28 per share after a disappointing earnings report.