F5 Networks (NASDAQ:FFIV), the application delivery heavyweight, helps companies simplify the management of their data center operations and delivery of services across diverse data center resources. It has pioneered the load-balancing technology that distributes internet traffic evenly across multiple servers, making them look like a single device. Optimizing growth in the application delivery network market, F5 has almost doubled its revenues and profits in the last 5 years.
The stock has lost around 20% of its market value in the last month. However, with a robust pipeline of future sale opportunities, we believe the company’s leadership to be as strong as its ever been. Here, we analyze certain prominent trends that shape the future prospects and in turn support our valuation of $128 for the company, which stands at a premium of 20% to the current market price.
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 to lower their 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.
Research firm Forrester projects the global market for cloud computing to increase from $41 billion in 2011 to $241 billion by 2020.  F5 Networks with a current application delivery network market share of 25% could significantly leverage on this growth. We estimate its market share to rise to 38% by the end of our forecast period.
Growing Focus on Mobile Application Delivery
With smartphones and tablets replacing PC’s as engines of growth for the semiconductor industry, an increasing number of companies are shifting focus to keep up with changing consumer trends. In 2010, PCs generated 97% of consumer Internet traffic. This will be reduced to 87 percent by 2015, demonstrating the effect of devices like tablets and smartphones on the way consumers access and use the Internet.
As the number of remote workers and mobile customers increase, enterprise demand for mobile application delivery is on the rise. Employees now use a variety of mobile devices and applications supported by different browsers, so enterprises need consistent application delivery across all devices, regardless of location or other variables that can interfere with mobile delivery.
With a growing enterprise need to support all of its end users from a device standpoint, mobile application support is the next logical step for many application delivery controller vendors. F5 manages to stay ahead of the trend by claiming to be the first company to adapt to Google’s (NASDAQ:GOOG) SPDY protocol (See Our Article: F5 Integrates Google’s Speedier Delivery Protocol To Make Web Faster)
Growth in Enterprise Internet Traffic
Increased adoption of advanced video communication in the enterprise segment is leading to a rise in business IP traffic which is expected to grow by a factor of 2.7 between 2010 and 2015. Web-based video conferencing reached 50% of total business video conferencing traffic in 2010 and is expected to grow faster than the average business video conferencing, at a CAGR of 45 percent.
High Gross Margins in Application Delivery
The application delivery market has been enjoying very high margins historically, and we expect them to remain constant throughout the forecast period. A competitive market for off the shelf components used in F5′s ADN products and its propriety software build out on the low-cost hardware, reinforce our belief of it keeping up with the industry trend of high margins.
Besides its product offerings in the application delivery market, 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 and its ability to provide consistent, quality customer service and technical support is a key factor in attracting and retaining large enterprise customers.Notes:
- More Predictions on the Huge Growth of Cloud Computing, Wall Street Journal, April 21, 2011 [↩]