Where Will F5 Networks’ Growth Come From?

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F5 Networks (NYSE:FFIV) has reported strong revenue growth in recent years driven by robust demand for its offerings. The application delivery networking (ADN) provider is a market leader, competing with Citrix Systems, Array Networks, Aryaka Networks and other large players such as Cisco (NASDAQ:CSCO), HP Enterprise (NYSE:HPE) and Juniper (NYSE:JNPR). The ADN market as a whole grew in mid single digits from 2012 through 2015, before picking up to double digit growth in 2016. This trend is expected to continue through the end of the decade, which is good news for F5 Networks.

Below we take a look key growth metrics for F5’s business segments, and why we remain optimistic with our $135 price estimate for F5 Networks, which is around 10% ahead of the current market price.

See our complete analysis for F5 Networks

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ADN Market And F5 Networks

Over the years, enterprise IT customers organizations have made investments in an attempt to optimize the secure delivery of their applications to users using server virtualization and, more recently, software-defined networking to reduce costs and increase flexibility of operations. F5 provides software-defined application services designed to ensure that applications delivered over networks remain secure to users across locations on any device. As IT infrastructure becomes increasingly dynamic and scalable, it also tends to become more complex. This is where F5’s core competency fits in. The company’s legacy software products provide a secure and effective way to ensure that applications can be reliably accessed over IP networks.

The ADN market has grown in mid to high single digits in the last few years, as shown below. Within this market, F5’s market share has fallen from over 25% in 2013 to 23% in 2016. This is attributable to growing competition, not only from new entrants in the 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 have to compete with the offerings of cloud vendors as well.

According to Global Info Research, the ADN market is expected to grow in double digits through 2021 to become an $8 billion market, up from $4.5 billion in 2016. We forecast F5 Networks to continue to lose share to competing firms in this domain. Its market share could further decline by around 4 percentage points to 17% by the end of the decade. Despite losing share in the market, we expect F5’s ADN business to continue to grow at around 4%, as shown above.

Services Key To Drive Growth

To offset the slowdown in product sales, F5’s services segment has grown in double digits in recent years.  As the delivery of IT solutions increasingly transitions from an “on-premise” deployment to a cloud-based model, software companies derive more of their revenues from services.

This trend should continue help fuel growth in F5’s services segment. We forecast services to continue to drive growth, albeit at a slower pace than historic levels. It is important to note that while the services business would have limited demand without the presence of core ADN product sales, the transition of customer preferences from license agreements to SaaS solutions serves as an opportunity for F5 monetize its services offerings.

You can modify the interactive charts in this article to gauge how changes in individual drivers for F5 Networks can have on our price estimates for the company.

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