Time To Exit F5 Networks Stock?

F5 Networks stock (NASDAQ: FFIV) has rallied more than 35% since the beginning of 2020, but at the current price of around $192 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 more than 2x from its March low. Further, after reporting mixed numbers for Q4 2020, and with rising expenses, we believe FFIV stock could slide lower. Our dashboard What Factors Drove 18% Change In F5 Networks Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

F5 Networks saw a 9% rise in the revenue per share, supported by an 8% increase in the P/S multiple, which led to the stock rising 18% since the end of 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 5x currently, riding the rally in the S&P 500. 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 led to an increase in online activity as people are spending more time on the internet and starting new blogs and online businesses. F5’s core business is application services and application delivery networking, and it has benefited from this surge in web activity. 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 uniform increase across all expense heads saw operating margins drop from 23.1% to 16.7%. This led to EPS falling 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 5x to around 4.6x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $165, a downside of almost 15% from the current price of $192.

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