F5 Networks (NASDAQ:FFIV) 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. As companies look to reduce overhead, they are increasingly consolidating their data centers and more efficiently delivering information over the web. F5 Networks (NASDAQ:FFIV) provides innovative solutions to customers to save money and energy for their data needs. While it competes with industry heavyweights Cisco Systems (NASDAQ:CSCO) and Juniper Networks (NASDAQ: JNPR), it has created a stable and profitable business. Despite the stiff competition, F5 continues to lead the market with a 25% market share, compared to Cisco’s 11%, a distant second.
The market for Application Delivery will grow from about $3 billion in 2011 to $8 billion by 2018. F5 Networks can ride this wave to a very enviable stock price as long as they continue to be among the leaders. Application Delivery comprises 62% of the stock price according our analysis. However, substantially all of the revenue is tied to this market as the remainder of income comes from installation, consulting and other services related to Application Delivery.
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We recently launched coverage on F5 networks with a $120 price estimate for the company’s stock. Our estimate is just ahead of the market price.
We have broken down our analysis of F5 networks into three major segments:
Application Delivery Network market
As websites continue to get richer and feature more dynamic and more interactive content, the existing infrastructure is becoming alarmingly insufficient. While high-speed broadband has tried to meet the infrastructure demands of the exploding volume and size of content on the Web, it is clear that throwing pure infrastructure at the problem isn’t enough.
The ADC market originated from the need of content providers to efficiently manage internet traffic on their servers. For example, if a company like Amazon got too many hits on a specific server it might get overloaded and shut down. ADC is able to load balance traffic across a number of servers to increase capacity.
Now ADC has evolved to become much more powerful, adding things like security, application acceleration features, and health monitoring. Organizations are also transforming their own data centers. They are increasingly turning to external, third-party cloud providers for services and storage, further reducing their own footprint and lowering their capital and operating costs.
The Application Delivery market generated close to $2.5 billion revenue in 2010 and is expected to net $2.9 billion in 2011. The growth rate for the Application delivery market is expected to be around 20%.
F5’s Dominant Position in the Application Delivery Market
F5 had a leadership position in the Application Delivery market with a market share of 25% and revenues in excess of $700 million in the $2.9 billion market. The company enjoys the position of being in the sweet spot of business and industry trends. Data center consolidation using virtualization technologies, cloud computing architectures, and the continued explosive growth of mobile applications and data are all industry trends which continue to be significant growth drivers for F5 solutions.
According to estimates, there are about 4 billion devices connected to the network in various forms, expected to grow to 15 billion by 2015 and at about 50 billion devices by 2020. Mobile carrier customers and terrestrial carrier customers are seeing traffic rates doubling every 6 months. Moreover, businesses are looking for ways to help control and give access to their mobile employees/clients on iPad, iPhone and Android devices.
F5’s products not only ensure a better performance for corporate applications and resources but also enables organizations to secure and manage access to corporate resources. We expect to see healthy growth for F5 from core ADC market solutions as well as incremental opportunities in expanding market areas such as service providers and the security market.
Backed by strong partnerships with enterprise solutions providers like Microsoft, HP, VMware and its strong technology platform, we believe that F5 will continue to see growth in its total addressable market.