Why F5 Networks’ Stock Looks Undervalued

by Trefis Team
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F5 Networks
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F5 Networks (NYSE: FFIV) provides multi-cloud application services across a wide range of deployment and consumption models. F5 Networks had a successful 2019 (ending September), with the company witnessing steady revenue growth for both its operating segments. Despite the strong performance, F5 Networks’ stock has lost a sizable chunk of its value, with the company’s stock falling from around $170 in February 2019 to $125 now. The primary reason for this decline has been a notable reduction in the company’s profitability resulting from higher expenses as a result of the company’s NGINX acquisition. However, demand for the company’s cloud services remains robust. We believe that the company’s stock is undervalued and estimate F5 Network’s valuation to be around $153, which is roughly 20% ahead of the current market price. Our price estimate takes into account the most recent earnings as well as the company’s guidance for the current fiscal year.

Fiscal Q1 2020 Earnings Recap and FY Q2 2020 Guidance

  • F5 Networks delivered a strong performance for its fiscal first quarter (ending December 2019), with the company beating consensus estimates for earnings and revenues.
  • The company’s total revenue increased by 5% year-over-year to $569.3 million, driven by a 50% jump in the company’s software business. Moreover, the company reported non-GAAP earnings per share of $2.55, well above the top-end of its guidance range due to strong revenue performance as well as disciplined operating expense management in the quarter.
  • F5 Networks provided an upbeat outlook for Q2 2020. The company expects non-GAAP revenue in the range of $580 to $590 million, which includes revenue contribution from the company’s latest acquisition, Shape Security. Additionally, the company expects adjusted EPS to be in the range of $2.14 to $2.17.

Below we provide a detailed explanation of the key factors that could impact the company’s valuation:

#1. F5 Is Transitioning Towards A Software Centric Business Model

  • While F5 derives a majority of its revenues from hardware products, it is transitioning its business model from a product-focused one to a software-based one. F5 Networks’ software revenues witnessed a growth of 60% in FY 2019.
  • This trend carried over in Q1 2020, with the company’s software revenues growing another 50%. Strong demand for security use cases, as well as ongoing enterprise licensing agreements traction, contributed to this growth.
  • Moreover, the company recently acquired Shape Security, a leader in fraud and abuse prevention, that should also fuel the company’s software growth in the coming quarters.
  • Additionally, F5 continues to enjoy strong renewals rates to software sold under perpetual licenses or as subscriptions, including NGINX-related sales. The company is also witnessing increased demand in consulting services associated with growing software sales.
  • Taking all this into consideration, we expect software will continue to drive the company’s growth for the foreseeable future.

#2. F5 Networks Will Benefit From Acquisition In FY’20

  • F5 acquired NGIXN in May 2019 and recently completed the acquisition of Shape Security. The acquisitions provide a solid platform for the company’s software business.
  • Moreover, the acquisitions offer F5 opportunities to cross-sell its products to NGINX and Shape customers – expanding the addressable markets for the company.
  • Shape, in particular, has been a great addition to the company’s application security portfolio. The acquisition will not only double F5’s addressable security market, but it will also scale and extend F5’s broad portfolio of application services.

Per Trefis estimates, F5 Networks’ adjusted EPS for 2020 is likely to be $10.13. Taken together with a P/E multiple of 15.1x, this works to a fair value of $152 for F5’s Stock, which is roughly 20% ahead of the current market price.

We highlight how F5’s P/E multiple has trended over the years, and compare this key metric with that for its peers Juniper and Cisco in our interactive dashboard.

 

See all Trefis Price Estimates and Download Trefis Data here

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