VALUATION HIGHLIGHTS

1. Services constitute 64% of the Trefis price estimate for F5's stock.
2. Application Delivery Network constitutes 28% of the Trefis price estimate for F5's stock.

WHAT HAS CHANGED?

1. F5 Stock Performance

FFIV stock has seen little change, moving slightly from levels of $175 in early January 2021 to around $185 now (Feb 8, 2024), vs. an increase of about 35% for the S&P 500 over this roughly 3-year period.

Overall, the performance of FFIV stock with respect to the index has been lackluster. Returns for the stock were 39% in 2021, -41% in 2022, and 25% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that FFIV underperformed the S&P in 2022.

2. Q1 2024 earnings

F5 Inc. delivered upbeat Q1 2024 (ending Dec 2023) results, with the company's EPS swelling from $2.47 in Q1'23 to $3.43 in Q1'24 despite a decline in total revenues from $700 million to $693 million over this period. The top line shrank due to a 10% fall in product sales, which more than offset the 7% rise in its services segment revenue.

BUSINESS SUMMARY

F5 Inc. 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. F5's products collectively simplify the management of data center operations and delivery of services across diverse data center resources.

F5 Inc. pioneered load-balancing technology that distributes internet traffic evenly across multiple servers, making them look like a single device.

SOURCES OF VALUE

Application Delivery Network

Application delivery network solutions continue to be a fast-growing segment in the enterprise networking market. The need for enterprises to invest less in building and owning a new data center and to optimize the existing facilities has led to an increase in demand for application delivery products, which deliver the same. Moreover, the shift to cloud-based applications and storage has also driven up the demand for application delivery products.

Services

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.

KEY TRENDS

Growth in enterprise Internet traffic

There is a growing adoption of advanced video communications in the enterprise segment. Web-based video conferencing and network management are expected to grow faster than average business video conferencing.

Shift to cloud-based services and storage

F5 is facing competition not only from new entrants in the ADC (Application Delivery Controller) market but also from native cloud-based service providers. Traditionally, ADC vendors have focused on helping customers manage applications in their own data centers. However, as more and more applications are now being deployed in Cloud data centers, ADC vendors are increasingly focused on evolving their support for applications on the cloud. Consequently, traditional load-balancing companies, such as F5 Inc., have to compete with the offerings of cloud vendors, such as Amazon. We can expect cloud-based load-balancers to command a larger percentage of the application delivery controller market in the future. This can hurt F5's revenue growth, too.

Security solutions are a key growth driver

With increasing network complexity, reducing security risk is an important criterion for enterprises. Over the years, data theft technology has become more sophisticated, and the global cybercrime market is currently sized at over $100 billion.