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Investment Overview for F5 Networks (NASDAQ:FFIV)
Below are key drivers of F5's value that present opportunities for upside or downside to the current Trefis price estimate for F5:
- Application Delivery Network
- Application Delivery Network market size: We estimate ADN market to cross $6 billion in revenue by the end of our forecast horizon. However, due to economic uncertainty, if the market only reaches $5.5 billion, there would be a more than 10% downside to our current price estimate for F5 Networks. On the other hand, if the market reaches $9 billion, there would be similar upside to our price estimate.
- Application Delivery Network market share: We forecast the market share for F5 to increase to around 26% by the end of our forecast period. We base our forecast on the basis that F5 will expand its ADC products to cover the complete ADN market. However, if F5 is unable to do so and its market share might remain at the current level, there will be marginal downside to our current estimate for the company. On the other hand, if F5 were to capture a significant portion of the adjacent market and increase its market share to around 35%, there will be 10% upside to our current price estimate.
F5 Networks is a leading provider of technology that optimizes the delivery of network-based applications and the security, performance and availability of servers, data storage devices and other network resources. F5’s products collectively simplify the management of data center operations and delivery of services across diverse data center resources.
F5 Networks pioneered load-balancing technology that distributes internet traffic evenly across multiple servers, making them look like a single device.
Application Delivery Network
Application delivery network solutions continue to be a fast growing segment in the enterprise networking market. The need for enterprises to invest less in building and owning a new datacenter and to optimise the existing facilities has led to increase in demand for application delivery products, which deliver the same.
Moreover, the shift to cloud based applications and storage has also driven up the demand for application delivery products. Sales from ADN products constitute more than 50% of F5's overall revenues. Moreover, F5 is the market leader in the application delivery market with more than 25% market share.
We believe that the application delivery market will increase to over $6 billion and F5's market share to increase marginally by, 2019.
F5 continues to derive a significant portion of its revenues from service and maintenance contracts. Its high quality of service is usually a selling point for its products. In 2014, services accounted for around 46% of its total revenues.
Growth in enterprise internet traffic
There is a growing adoption of advanced video communications in the enterprise segment. This is expected to fuel growth in business IP traffic by a factor of 2.7 between 2010 and 2015. Web-based video conferencing is expected to grow faster than average business video conferencing at a CAGR of 45%.
Shift to cloud based services and storage
As organizations transform their own data centers, they are increasingly turning to external, third-party cloud providers for services and storage, further reducing their footprint and lowering capital and operating costs. To accommodate the dynamic needs of their clients, cloud providers are building large virtualized data centers to host a constantly changing mix of on-demand resources. Within the past two years, F5 has benefited from this trend in two ways: first, as cloud providers have deployed its products within their data centers; and second, as their customers have deployed F5's products to switch traffic quickly and easily between their own internal resources and the cloud.
The ADC market continues to growth, though at a slower rate
While the ADC market witnessed a double-digit growth in 2012, the growth rate declined to 4% in 2013. (Link) Despite the slowing growth, the ADC market continues to have immense long term growth potential. According to the research firm TechNavio, the global ADC market will grow at a CAGR of 8.13% between 2013 and 2018. One of the key factors contributing to this market growth is the increasing workload distribution using ADCs. The Dell’Oro Group believes that the the expansion of security features in the ADC platform has and will continue to drive demand in the future.
Security solutions is a key growth driver
With increasing network complexity, reducing security risk is an important criterium for enterprises. Over the years, data theft technology has become more sophisticated and the global cyber-crime market is currently sized at $104 billion. (Link) IDC estimates that companies around the world will spend $491 billion in 2014 for fixes and recovery from data breaches and malware, $127 billion in dealing with security issues and $364 billion dealing with data breaches. (Link)
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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