20% Downside For F5 Networks Stock?

by Trefis Team
-0.67%
Downside
208
Market
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Trefis
FFIV
F5 Networks
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F5 Networks stock (NASDAQ: FFIV) is roughly unchanged since 2018-end, but at the current price of near $161 per share, we believe that F5 Networks stock has around 20% potential downside.

Why is that? Our belief stems from the fact that F5 stock is still up around 15% since the start of the year, and a strong 70% from its low in March. Further, after posting mixed Q4 2020 numbers, and with demand still not up to pre-Covid levels, we believe F5’s stock could drift lower. Our dashboard What Factors Drove -1% Change In F5 Networks Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

F5 stock’s has remained flat since late 2018, as a 9% drop in revenue per share was canceled out by an equal rise in the P/S multiple.

F5’s P/S (price-to-sales) ratio dropped from 4.6x in 2018 to 3.7x in 2019, but has since jumped to 4.2x currently. However, given F5’s mixed Q4 ’20 numbers, and the fact that demand has still not risen to pre-Covid levels, there is possible downside risk for F5’s multiple.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus and the resulting lockdowns have led to a growth in online activity. This should benefit F5, whose business involves providing computing, storage, and network resources for web applications, and the Q4 2020 numbers reflect that, with revenue coming in at $2.35 billion vs $2.24 billion in 2019. However, F5 has seen a sharp drop in profitability due to rising costs across all expense heads. Operating margins dropped to 16.7% vs 23% in 2019, and this weighed down EPS to $5.05 vs $7.12 in 2019.

F5 saw a growth in revenue, and the current environment should see this growth continue in the near-to-medium term, but we believe that if F5 cannot ensure expenses growing at a rate slower than revenue growth, the stock will see its P/S multiple decline from the current level of 4.2x to around 3.7x , which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $130, a downside of around 20% from the current price of $161.

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