Strong Revenue Growth Could Push F5 Networks Stock To Fresh Highs

Despite rising more than 2x from its low in March 2020, at the current price of $210 per share, we believe F5 Networks stock (NASDAQ: FFIV) has further upside potential. F5 stock has increased from $100 to $210 off its March 2020 bottom, more than the S&P which increased by around 80% from its lows. Further, the stock is up around 60% from the level it was at before the pandemic. However, we believe that F5 Networks stock could rise around 10% to set fresh highs above its early-2021 high of $216, driven by expectations of strong demand and strong Q1 2021 results despite the pandemic. Our dashboard What Factors Drove 60% Change In F5 Networks Stock Between 2017 And Now? has the underlying numbers behind our thinking.

F5 stock’s rise since late 2017 came due to a 12% rise in revenues from $2.1 billion in FY 2017 to $2.35 billion in FY 2020 (F5’s fiscal year ends in September). However, a 35% drop in net margins, led to a 27% drop in net income, which combined with a 5% drop in the outstanding share count, led to EPS dropping 23% over this period.

Further, F5’s P/E (price-to-earnings) ratio jumped from 20x in 2017 to 35x by 2020-end, and has since risen further to 42x currently, riding the rally in technology and internet stocks. We believe that the company’s P/E ratio has the potential to rise further in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

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 even more now. This is beneficial to 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 $625 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 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.

Despite the economy opening up and people stepping out more, work from home seems to have become the new norm, and it’s likely that fresh networking product demand will remain strong, and this could lead to steady revenue growth for F5 Networks in the near to medium term. If the company is able to control expenses going forward, this could mean higher profitability over the rest of FY 2021. We believe this could lead to the stock seeing its P/E multiple rise further, which combined with a growth in revenues and margins could result in the stock price rising around 10% to fresh highs.

While F5 Networks stock does seem attractive, 2020 has created many more pricing discontinuities which can offer undervalued 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.

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