By optimizing growth in the application delivery network market, F5 Networks (NASDAQ:FFIV) has almost doubled its revenues in the last 5 years while posting a light y-o-y increase in gross profits. Despite current macroeconomic headwinds, F5 posted a strong Q3 2012, registering a 16% y-o-y increase in net income.
However, the company’s stock has lost close to 43% of its value since hitting a peak of $138 in April 2012. Keeping in mind the robust pipeline of future sale opportunities, we continue to believe in F5’s strong fundamentals. We expect the sudden decline in price is more on account of near-term macro concerns and continue to believe in the long-term growth prospects of the company.
F5 Networks helps companies simplify the management of their data center operations and delivery of services across diverse data center resources. With the explosion of data and growth in Internet traffic, we expect to witness a continuous increase in growth opportunities in the application delivery market.
Growth in Enterprise Internet Traffic & Shift To Cloud-Based Services
The increasing adoption of advanced video communication in the enterprise segment has led to the rise in business IP traffic, which is expected to grow at a rapid pace in the years ahead. 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. Research firm Forrester projects the global market for cloud computing to increase from $41 billion in 2011 to $241 billion by 2020. ((More Predictions on the Huge Growth of Cloud Computing, Wall Street Journal, April 21, 2011))
F5 has a strong customer focus and has developed technology partnerships and alliances with major application vendors, including Oracle and SAP. The company also works closely with two major server virtualization vendors, Microsoft and VMware, to help its customers get the most out of their virtualization deployments. Additionally, F5 recently collaborated with industry leader Bluelock to migrate its online community, Dev Central, to a cloud environment. (Read: F5 Networks Migrates Its Online Community To A Cloud Environment)
Accounting for close to 25% of the market, F5 Networks is a dominant player in the application delivery network market. With a number of leading technology partners, strong application and feature-rich products and a dedicated sales and distribution channel, we expect F5’s market share to increase to 38% by the end of our forecast period.
F5 Will Continue To Maintain High Gross Margins
The application delivery market has been enjoying very high margins historically, and we expect the margins to remain constant throughout the forecast period. A competitive market for off-the-shelf components used in F5′s ADN products and the company’s propriety software built on low-cost hardware reinforce our belief that F5 will keep up with the industry trend of high margins.
Mobile Traffic Growth Will Lead To Increase In Mobile Application Delivery
With the rapid growth in smartphones and tablets and a slowdown in PC growth rate, sales of mobile devices are expected to outpace PC shipments in the coming years. In 2010, PCs generated 97% of consumer Internet traffic and the percentage is estimated to decline substantially by 2015, demonstrating the effect of devices like tablets and smartphones on the way consumers access and use the Internet.
With an increase in the number of remote workers and mobile customers, 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 managed 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)
Our price estimate of $135 for F5 Networks marks our valuation at a premium of close to 4o% over the current market price.