Is It Best For F5 Networks To Sell-Off Itself?

F5 networks (NYSE:FFIV) this week traded up 12% higher following reports that the company retained Goldman Sachs (NYSE:GS) to represent the company in the wake of apparent buyout offers. In the past, F5 has surfaced as a potential acquisition target among the tech giants such as IBM (NYSE:IBM), Cisco (NYSE:CSCO) and Juniper (NYSE:JNPR). As is generally the case, neither Goldman  nor F5 would comment.  Although no deal has arisen from any previous such talks, here are reasons as to why F5 Networks might well consider a sell-off this time. Consider the following:

1. Difficult Application Delivery Controller Market: According to Gartner, F5 Networks has remained a market leader and has seen market share gains in the ADC market in the past few years. ^[1]. Also, according to past reports, the ADC market was expected to grow at a CAGR of 12.5% during 2013-2018 period. However, given that F5’s product revenue growth has averaged around 6% only in the past 3 years, we shall be overly optimistic if we assume a 10% growth for the next 5 years. According to our model, we expect F5’s product revenue to grow at an average rate of approximately 5% during this period. This is a sharp decline as compared to F5’s product revenue growth of 29% between 2010-2012.
2. Cloud based services may well disrupt the ADC market: Until a few years ago, before the popularity of cloud based services, we were clear about the fact that the ADC market size was directly proportional to the number of web applications being deployed. However, more and more applications are being deployed in the public cloud, where there is less need for a traditional load-balancer. For example, Amazon (NYSE:AMZN) uses elastic load balancing (ELB), which is used to distribute incoming application traffic across multiple Amazon EC2 instances in the cloud, for applications using Amazon web services. Although F5’s load-balancer is customisable and is built on high-performance hardware, Amazon’s ELB is a bit different and it completely abstracts the hardware. Further, the plus point for an Amazon ELB is that it wipes out the hassle of installing and customizing a dedicated hardware for load balancing, which is a must in case of BIG-IP based products. Going ahead, cloud based load-balancers may well disrupt the traditional application delivery controller market, which can largely affect F5’s revenue growth. This is one key reason as to why we forecast F5’s product revenue to grow in mid-single digits and not experience double digit growth over the next 5 years.
3. F5 Networks stock has relatively under-performed of late: Over the past one year, the company’s stock has hovered between a high of $134 and $86. For most of the time, the stock remained below the levels of $110. This can be attributed to a weak guidance for the coming quarters and a roughly flat revenue growth during this period. Further, the company also lost a patent battle against Radware which took a bite of its earnings during this period.
4. The upcoming product refresh cycle can provide the much needed revenue growth: Though the company hasn’t provided the details of the upcoming product refresh cycle, F5 Networks is on its way for the hardware upgrade of its current line up of products. This upgrade holds the potential to boost the company’s short-term products revenue. F5’s high cash and no debt position, along with its short-term revenue growth prospects, makes it an attractive acquisition target at this time. The company can command a relatively higher premium if it sells-off itself at this point of time.

For information, please refer to our complete analysis for F5 Networks

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1. F5 Networks Named a Leader, Gartner, October 2015 [↩]