F5 Networks’ Stock Has Outperformed S&P 500 In 2020, Will This Trend Persist?

by Trefis Team
F5 Networks
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Despite F5 Networks (NASDAQ: FFIV) stock remaining stagnant since the beginning of this year, we believe that F5’s stock is likely undervalued at the current price of $140 per share and offers upside opportunities. Our belief stems from the fact that F5 Networks’ stock remains about 15% lower than the figure seen in early 2019. Our dashboard, What Factors Drove 7% Change In F5 Networks Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Some of the stock price gain over the last two years is justified by the roughly 7.3% growth seen in F5 Networks’ revenues from 2017 to 2019. Although the gain was mitigated by 100 basis points decline in the net income margin from 20.1% in 2017 to 19.1% in 2019. However, a 6.4% reduction in share count due to stock repurchases worth $0.8 billion helped earnings per share increase by almost 9% over the same time period. Notably, F5 has about $810 million in cash as of the last report, and the company will very likely continue to buy back shares as it still has around $1.3 billion remaining under its share repurchase program.

Finally, F5 Networks’ P/E ratio remained almost flat over 2017-2019, with the multiple shrinking marginally from 20x at the end of 2017 to 19.6x at the end of 2019. While F5 Networks’ P/E has remained constant around 19.6x now, we believe, there is a decent upside for F5 Networks’ multiple when compared to levels seen in 2018- P/E of 22x.

How Is Coronavirus Impacting F5 Networks’ Stock?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely impact F5 Networks’ revenues as major companies are likely to delay expenses related to upgrading infrastructure and software. However, digital usage has received a real push as most employees are working online and working from home. Even the brick and mortar companies have been forced to experiment with the digital channel. This has boosted demand for the company’s offerings for security solutions as well as multi-cloud application services. This is one of the probable reasons that the company has outperformed the broader market since the outbreak of coronavirus.  While the S&P 500 is down 12% since the beginning of the years, F5 Networks stock has remained constant over the same time period. During Q2 2020 earnings (ending February), F5 saw a surge in demand for its solutions related to critical application infrastructures.  The company also witnessed increased demand for capacity as customers looked to scale their remote access capabilities. Notably, the company witnessed an increase in revenues across both its services and products business.

Overall, the company’s revenues are likely to remain upbeat in FY 2020 as the industry adapts to ‘work from home culture’/digital transition.  F5 has largely remained immune from the impact of Covid-19 and we expect these tailwinds to persist. Even if the situation worsens, the company is in a better position than other companies to face the repercussions of the outbreak due to its unique business model. As of now, we believe that the company’s stock is currently undervalued and offers significant upside returns.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

Another Opportunity: F5 Networks’ Peer, Cisco’s P/E Multiple Is At The Lowest Level In 3 Years: Time To Buy Cisco Stock?

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