Why We Believe F5 Networks Is Worth $129

F5 Networks (NASDAQ:FFIV), a leading provider of technology used for optimizing the delivery of network-based applications, has seen its revenue base almost triple in the last five years, from a little over $500 million in 2009 to approximately $1.5 billion in 2014. Being a leading player in the Application Delivery Controller (ADC) market, F5 has successfully managed to leverage growth in a market driven by rising Internet traffic, data center build-outs and the increasing shift to cloud-based services and storage.

Can F5 manage to sustain its strong growth momentum in the future? We believe that the company will continue to grow at a strong pace, albeit at a slower rate compared to the past. F5 continues to invest in  technology in key areas such as security, mobility, the cloud, and software-defined application services. Despite intense competition in the market, we believe the company will manage to defend its market share as it continues to launch cutting-edge products and stays in line with emerging trends in the market.

Our price estimate of $129 for F5 Networks is approximately 10% above the current market price.

See our complete analysis for F5 Networks here

Security Business Remains The Largest Growth Driver

F5 believes that its security business will be its most important growth driver. With increasing network complexity, reducing security risk is an important criterion for enterprises. The cyber security market is estimated to grow from $106.32 billion in 2014 to $170.21 billion by 2020. ^[1] Since its entry in the Internet firewall market in February 2012, F5 has significantly expanded its security solutions portfolio with the addition of new products. Because requirements continue to increase for customers to protect their applications in both on-premise data centers and in private and public clouds, the company sees continuing demand for its products in the future.

F5 claims that, given the highly visible cyber security attacks in Q3 2015, more customers from an increasing diverse pool are approaching the company to tap its ability to secure applications, manage user policy and access, and mitigate application attacks across traditional networks. As a result, F5 had a number of notable wins in Q3 2015, including a branch of the U.S. government and a prestigious medical research group, both of which needed to secure their organization’s remote access capabilities. Additionally, a multi-national defense contract to purchase its Access Policy Manager for single sign-on federation and three national carriers came to F5 for a variety of security solutions. In Q3 2015, F5 signed its largest largest service provider security deal to-date, a multi-million dollar agreement with a domestic tier 1 carrier.

In the current quarter, F5 will launch the next version of BIG-IP, version 12.0, which will help customers navigate their application centric environment without compromising security or operational efficiency. F5 expects to see strong demand for its expanding portfolio of security solutions as customers look to adopt hybrid architectures, deploying applications both in premise and in the cloud.

‘Good, Better, Best’ Pricing Model’ To Drive Software Sales

F5 introduced the ‘Good, Better, Best’ pricing model in November 2013 to help customers maximize their value of enterprise application delivery. The program helps customers select a platform that best fits the organizations’ needs, offering advanced traffic management, optimization and security services. The company claims that the model makes it easier to package its solutions together for the customer, giving them some incentive to add more modules.

F5 continues to experience strong momentum in the ‘Good, Better, Best’ bundles, with increasing number of the customers opting for the ‘Best’ solutions. Sales of these bundles now account for a significant percentage of its overall sales.

Cisco ACE Replacement Opportunity

In 2012, rival firm Cisco announced its decision to exit the ADC market after losing more than 50% of its market share to F5 and Citrix. F5 has scored big product wins by replacing some of Cisco ACE products in large customer accounts since then. The ACE installed base is over $1 billion of potential business, but F5′s target market is much larger. In addition to replacing Cisco’s existing solutions, F5 has the added opportunity of providing customers additional functionality including security, access control and application acceleration. F5 expects  the opportunity to continue throughout 2015 and beyond.

F5 Losing Share In The ADC Market?

F5 was recently downgraded by Guggenheim, with the firm stating that the company’s core ADC business is slowing and it has become a net ADC share donor. Gartner’s most recent market share data shows that F5 lost 130 basis points of revenue share from Q1’15 to Q215, and 60 basis points from Q214 to Q215. ^[2]

F5 derives a significant portion of its revenue from the ADC market, and has been the leader in ADCs for many years. The company did a comprehensive refresh of its product portfolio in 2013 which significantly expanded its addressable market. As the gains of the refresh dry up, the company might not be able to increase its market share at the historic rate, but we still believe that F5 Networks has the expertise, resources and capital to defend its leadership in the ADC market for years to come.

Competition Cannot Be Ignored

Citrix’s partnership with Cisco in various areas of data center and virtual desktop infrastructure poses as a threat to F5. Additionally, Citrix is a leading player in virtualization offerings, which is a fast growing sub-segment of ADC. In addition to Citrix, F5 also competes against start-up firm A10 Networks and other smaller players such as Riverbed Technology (NASDAQ: RVBD), Radware (NASDAQ: RDWR) and Brocade (NASDAQ: BRCD).

With intense competition in the market, F5 might find it difficult to gain additional share in the application delivery network market. However, given the above factors, we believe that the company is in a strong position to retain its current market share.

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1. Cyber Security Market worth $170.21 Billion in 2020, Markets and Markets [↩]
2. F5: Guggenheim Cuts to Hold; Surrendering Share in Apps Controller Market, Barron’s, September 22, 2015 [↩]