Led by strong single digit sequential growth in service revenues and a marginal increase in product revenues, F5 Networks (NASDAQ:FFIV) posted a solid Q3 2012 with 21% y-o-y and 4% q-o-q increase in revenues despite the soft macro economic environment. Although F5 maintains a conservative revenue target for 2012 due to persisting economic headwinds and a cautious spending environment, we remain positive on the company’s long-term growth prospects.
F5 Networks will announce its Q4 2012 earnings on Wednesday, October 24, and we expect it to register another quarter of strong growth. The stock has lost close to 20% of its value since the start of the year, which we think is more on account of macroeconomic factors as F5 continues to have strong fundamentals to support a higher valuation. Here we list certain factors that reiterate our belief.
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Shift To Cloud Based Services and Storage Will Benefit F5
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.  With a current application delivery network market share of 25%, we believe F5 Networks has the potential to significantly leverage this growth.
Dev Central, F5 Network’s online community, recently collaborated with industry leader Bluelock to migrate the community to a cloud environment. Additionally, it also announced a new global cloud licensing program developed for Infrastructure-as-a-service (Iaas) cloud providers that offers benefits to providers, customers and channel partners alike.
Growing Security Concerns – F5’s Entry into Internet Firewall Market
With the explosion of data and processing required online, security has become a major concern for most enterprises and, thus, this is one segment bound to witness tremendous growth in coming years. With its Big-IP 11.1 software passing the ISCA Labs test for network firewalls, F5 entered the Internet firewall market in February 2012. In addition to improving products, the company is coming out with innovative programs to boost its security solutions sales. By pushing into the firework market that aims to protect data centers, F5 will take on networking major Juniper Networks.
With the upcoming launch of the TMOS upgrade code-named “Solar,” which targets corporate customers and telecom service providers and also focuses on protecting web applications from Internet attacks, F5 intends to take on other network-focused security providers.
Focus on Mobile Application Delivery A Good Long-Term Strategy
As the number of remote workers and mobile customers increase, enterprise demand for mobile application delivery is on the rise. Chrome, Amazon Silk and Mozilla Firefox are the standards that are becoming increasingly important for remote users who need a more efficient traffic flow that consumes less bandwidth on their mobile devices. Keeping this in mind, Google (NASDAQ:GOOG) has designed its SPDY application-layer protocol which provides minimal latency while transporting content over the Web via the typical HTTP protocol.
In May this year, F5 announced updates to application delivery optimization that makes BIG-IP the first ADC on the market to support Google’s SPDY protocol. F5’s application delivery optimization offering provides a better mobile user experience, optimizing image delivery and rendering of web pages in a much quicker environment.
Keeping it well in-line with changing trends and developments, we expect F5’s focus on mobile application delivery can further push its share up in the application delivery network market.
Our price estimate of $135 for F5 Networks marks our valuation at a premium of close to 4o% over the current market price.Notes:
- More Predictions on the Huge Growth of Cloud Computing, Wall Street Journal, April 21, 2011 [↩]