Despite Revenue Growth, F5 Networks Stock Can Drop by 15%

FFIV: F5 Networks logo
F5 Networks

F5 Networks stock (NASDAQ: FFIV) is up 16% since the beginning of this year, but at the current price of around $163 per share, we believe that F5 Networks stock has 15% potential downside.

Why is that? Our belief stems from the fact that F5 Networks stock is up around 80% from its March low. Further, after posting mixed Q4 2020 numbers, and with rising expenses, we believe FFIV 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.

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F5 Networks saw a 9% rise in the revenue per share, canceled out by an 8% decrease in the P/S multiple, which led to the stock remaining roughly unchanged since late 2018.

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 performance, there is possible downside risk for the P/S multiple.

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

The global spread of coronavirus and the resulting lockdowns in early 2020 have led to an increase in online activity as people are spending more time on the internet. F5 is in the business of application services and application delivery networking, and has benefited from this surge in browsing. This is evident from F5’s full-year 2020 results, where revenue rose to $2.35 billion from $2.24 billion in FY 2019. However, a rise across all expense heads saw gross margins drop from 84.1% to 82.6% and operating margins drop from 23.1% to 16.7%. This led to EPS dropping from $7.12 in 2019 to $5.05 in 2020.

Going forward, we expect revenues to stay strong in the near to medium term, but if the company is not able to control expenses, we believe 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 $140, a downside of almost 15% from the current price of $163.

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