Despite rising more than 80% from its low in March 2020, at the current price near $180 per share, we believe F5 Networks stock (NASDAQ: FFIV) has strong upside potential. FFIV stock has risen from $100 to $182 off the recent bottom, almost in line with the S&P which increased by over 80% from its lows. Further, the stock is up almost 1.4x from the level it was at before the pandemic. However, we believe that FFIV stock could regain its early-2021 high of $216, rising more than 15% from its current level, driven by expectations of continuing demand growth, despite mixed Q2 2021 earnings. Our dashboard What Factors Drove 39% Change In F5 Networks Stock Between 2017 And Now? has the underlying numbers behind our thinking.
The stock price rise since 2017-end came due to a steady 12% rise in revenue from $2.1 billion in FY 2017 to $2.35 billion in FY 2020 (F5’s fiscal year ends in September). However, net margins dropped from 20.1% to 13.1% due to rising expenses, and despite a 5% drop in the outstanding share count, this led to a 23% drop in EPS from $6.56 in FY 2017 to $5.05 in FY 2020.
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F5 Networks’ P/E (price-to-earnings) multiple rose from 20x in 2017 to 35x by 2020 end, and has since risen marginally to 36x. 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 in early 2020 affected networking product demand. However, demand has gotten back on track, and this is evident from F5’s strong Q2 2021 earnings, where product revenue came in at $309 million vs $260 million for the same period in FY 2020, a jump of almost 20%. This helped drive total revenue to $645 million, from $583 million in Q2 2020. However, rising COGS and operating expenses saw operating margins fall to 8.3% from 14.3%. This led to EPS dropping to $0.71 from $1.01 over this period.
Despite this, demand growth is expected to continue in the near-term, driving F5’s revenues higher across all segments. Additionally, with the lockdowns being lifted and manufacturing capacity rising back to pre-pandemic levels, we believe the company will see additional revenue and margin growth in the medium term. These factors will raise investor expectations further, driving up the company’s P/E multiple. We believe that F5’s stock can rise more than 15% from current levels, to regain its early-2021 highs of $216.
While F5 Networks stock may be undervalued, it is helpful to know how its peers stack up. F5 Networks Stock Comparison With Peers summarizes how F5 Networks compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.