We think that F5 Networks Inc. (NASDAQ:FFIV) currently is a better pick compared to Juniper Networks Inc. (NYSE:JNPR). FFIV stock trades at about 41x trailing earnings, slightly lower than JNPR, whose P/E multiple stands at 45x. Further, FFIV has a P/EBIT ratio of 33.5x, much lower than JNPR’s 42x. Does this gap in the companies’ valuations make sense? We don’t think so. While both companies have benefited from the pandemic due to a general rise in demand for networking security and products, both have also seen a steady decline in margins over the years due to rising costs and lower average selling prices. While, FFIV has seen a stable rise in revenues from $2 billion in FY ’16 to $2.5 billion on an LTM basis (FFIV’s fiscal years ends in September), its EBIT margins have slipped from 27.4% to 14.4% over the same period. However, JNPR has seen revenue slide from $5 billion in FY ’16 to $4.6 billion on an LTM basis, with EBIT margins dropping to less than a third, from 17.8% to 4.8% over the same period.
Having said that, there is more to the comparison, which makes FFIV a better bet than JNPR, especially at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard F5 Networks vs Juniper Networks: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. F5 Networks Is The Clear Winner On Revenue Growth
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While JNPR has seen revenue fall from $5 billion in FY ’16 $4.6 billion on an LTM basis, F5’s revenues have steadily risen from $2 billion to $2.5 billion over the same period. Additionally, in terms of post pandemic recovery, F5 has outperformed Juniper again, with revenues rising from $2.2 billion in FY ’19 (the pre-pandemic FY) to $2.5 billion on an LTM basis (a rise of 14%), compared to Juniper’s revenues which rose from $4.4 billion to $4.6 billion over the same period (a rise of only 5%).
2. EBIT margins: A negative for both companies
Both companies have seen steadily dropping margins over the past five years. F5’s EBIT margins fell from 27.4% in FY ’16 to 14.4% on an LTM basis, dropping to almost half. However, JNPR’s EBIT margins dropped to less than a third from 17.8% to 4.8% over the same period. Both companies have been affected by dropping selling prices, and a steady rise in operating expenses.
While Juniper’s margins fell more than F5’s, this drop also leaves JNPR with very a small EBIT margin, which stands at just one-third that of F5’s current EBIT margin.
Despite dwindling margins for both companies, with F5’s steadier revenue growth and higher relative EBIT margin, we believe FFIV is a better bet than Juniper.
3. FFIV Is Also In A Better Net Cash Position
F5’s debt-to-equity ratio currently stands at 3.1%, a fraction of Juniper’s current debt-to-equity ratio that stands at 18.4%. Additionally, both companies’ cash-to-assets stand at around 15%, putting FFIV in a better overall cash position than JNPR.
The Net of It All
While Juniper’s revenues are larger than that of FFIV, the latter has a higher EBIT margin and has seen higher historical revenue growth. Our comparison of the post-Covid recovery above, also shows that FFIV has been performing better than JNPR lately. Finally, as JNPR has a higher P/EBIT ratio of 42x vs FFIV’s 33x, and a higher P/E ratio at 45x vs FFIVs 41x, F5 Networks has the potential to close this gap, supported by strong financials. As such, we believe that F5 Networks is currently a much better bet compared to Juniper Networks stock.