F5 Networks stock (NASDAQ: FFIV) is up more than 40% since the beginning of 2020, and at the current price of $199 per share, we believe that F5 stock has around 15% potential downside.
Why is that? Our belief stems from the fact that F5 Networks stock is up around 2x from the low seen in March 2020. Further, after posting mixed Q1 ’21 numbers, it’s clear that F5 Networks did not benefit from the pandemic. Our dashboard What Factors Drove 22% 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 stock’s rise since late 2018 came due to a 9% rise in revenues from $2.16 billion in FY 2018 to $2.35 billion in FY 2020 (F5’s fiscal year ends in September). A roughly unchanged outstanding share count over this period, meant that RPS (revenue-per-share) came in higher at $38.59 in 2020 vs $35.28 in 2018, an increase of almost 10%.
F5’s P/S (price-to-sales) ratio dropped from 4.6x in 2018 to 3.7x in 2019, but has since risen to 5.2x currently, riding the rally in technology and internet stocks. However, given F5’s mixed Q1 2021 results, there is possible downside risk for the company’s P/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 surge in internet activity, driving businesses to increase their online presence, with people using the web more than ever before. This should benefit F5 Networks, a company that specializes in application services and application delivery networking, as is evident from F5’s revenue in Q1 2021. Revenue came in at $624 million, up 10% from $569 million in Q1 2020. However, the company was unable to control operating expenses in line with revenue growth, and operating margins, in fact, came in lower at 18.8%, down from 21.4% in Q1 2020. This led to EPS dropping to $1.43 from $1.62 for the same period.
With the economy opening up and people stepping out more, it’s likely that fresh networking product demand will be weak, and this could lead to low revenue growth for F5 Networks in the near to medium term. If the company is unable to control expenses, then this could mean low profitability over the rest of FY 2021. We believe this could lead to the stock seeing its P/S multiple decline from the current level of 5.2x to around 4.6x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $170, a downside of 15% from the current price of $199.
While F5 Networks stock may not seem attractive, 2020 has created many more pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Apple vs Microsoft. Another example is Ansys vs Adobe.