Can F5’s Focus On Cloud Offerings Help Expand Its P/E?

F5 Networks (NYSE:FFIV) is a major player in the application delivery platform management market. The evolution of data center usage, growing preference for cloud-centric application management and increasing convergence has led to many of the company’s products becoming more of a legacy offering. And while the company has been expanding its footprint by way of cloud-based offerings, the markets are likely to wait for sustained execution before assigning higher P/E multiples to a relatively slow-growing company.

We currently have a price estimate of $168 per share for F5, which is marginally lower than the current market price. Our interactive dashboard on F5’s Price Estimate outlines our forecasts and estimates for the company. You can modify any of the key drivers to visualize the impact of changes on its valuation.

Competitive Landscape

F5’s management doesn’t believe that the company is necessarily competing with the likes of AWS and Azure, despite the fact that it is offering load balancing. The company’s rationale of viewing cloud providers as partners is predicated on the belief that cloud vendors are servicing ‘simple’ load balancing requirements (which F5 currently doesn’t support) for companies that are “born-in-the-cloud either in test or development or even production”. F5’s core area of focus is the more complex load balancing requirements of large enterprises for multi-cloud and hybrid cloud deployments, where F5 wins due to its cloud-agnostic nature.

As the company launches F5-as-a-Service (F5aaS) in 2019, F5 will be able to also service the relatively lower end of load balancing requirement, increasing the company’s ability to compete in the markets. F5’s seriousness towards improving its cloud footprint can be gauged by its recent hirings of AWS veterans to lead its cloud sales team and F5aaS.

While the company’s own expectations for gross margins in the medium term stand between 85-87%, consensus estimates of revenue growth are in the sub 5% range. Understandably, the market is in a wait and watch mode. F5 will need to deliver on its planned footprint expansion across the cloud space, while maintaining its core on-premise business, before the company sees any expansion in valuation multiples.

Do not agree with our forecast? Create your own price forecast for F5 by changing the base inputs (blue dots) on our interactive dashboard.