F5 Networks Stock is Fully Valued At $140

Despite a 42% rise since the March 23 lows of this year, at the current price of around $140 per share we believe F5 Networks stock (NASDAQ: FFIV) has reached its near term potential. F5 Networks stock has rallied from $99 to $140 off the recent bottom compared to the S&P which moved 51% over the same time period. Despite a surge in demand for the company’s offerings for security solutions, as well as multi-cloud application services, the stock has underperformed the market. This can be partly attributed to the soft guidance that the company provided after its Q3 2020 (ending June) results. Moreover, F5 Networks stock is up 6% from levels seen in early 2018, over two years ago. While F5 Networks stock has recovered and is close to the price it was at in February before the drop due to the coronavirus outbreak becoming a pandemic, the stock seems to be fairly valued as of now. Our dashboard ‘Why F5 Networks Stock moved 6%?’ provides the key numbers behind our thinking, and we explain more below.

Some of the stock price rise of the last 2 years is justified by the roughly 7% growth seen in F5 Networks’ revenues from $2.1 billion in 2017 to $2.25 billion in 2019. Although the gain was mitigated by a 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.

Finally, F5 Networks’ P/E ratio remained constant around 20x over 2017-2020 and the company’s P/E multiple is at a similar level in 2020-implying that the stock is appropriately valued. We believe that the stock is fairly valued and is unlikely to see much upside, keeping in mind the recent rally and the potential weakness from a recession-driven by the Covid outbreak.

How Is Coronavirus Impacting F5 Networks’ Stock?

The global spread of coronavirus has adversely affected industrial and economic activity. This is likely to negatively 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. During Q3 2020 earnings (ending June), 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. In addition, 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.

Moreover, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus, which set a floor on fear, the market has been willing to “look through” the current weak period and take a longer-term view,  with investors now mainly focusing their attention on 2021 results.

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