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

-7.41%
Downside
190
Market
176
Trefis
FFIV: F5 logo
FFIV
F5

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.

Relevant Articles
  1. Should You Pick F5 Stock At $185 After Q1 Beat?
  2. After A 13% Fall This Year How Does Ciena Compare With F5 Stock?
  3. Should You Pick F5 Stock Over Teleflex?
  4. Will F5 (FFIV) Stock Recover To Its Pre-Inflation Shock Level of $250?
  5. What’s Next For F5 Stock After A 40% Fall Since 2021?
  6. F5 Inc. Stock Set For Bounce After Dismal Post-Earnings Performance?

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.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams