F5 stock (NASDAQ: FFIV) currently trades at $146 per share, around 9% above its level in November 2022, and it seems like it has little room for gains. F5 saw its stock trading at around $153 in June 2022, just before the Fed started increasing rates, and is now 4% below that level. The stock has gained a mere 1% since its low in September 2022 compared to the S&P 500, which gained about 18% during this period. The underperformance of FFIV stock over recent months can be attributed to its downbeat guidance. Although the rally in broader markets has been driven by a steady decline in the inflation rate in response to the Fed’s aggressive rate hike plan, investors still have concerns about a potential recession. The steady increase in F5’s revenues over recent quarters has failed to spark any rally in the stock thus far.
Returning to the pre-inflation shock level means that FFIV stock will have to gain around 70% from here. However, we do not believe that will materialize any time soon, and we estimate F5’s valuation to be about $153 per share, implying just 4% gains. This is because the recent uncertainty in the financial sector has made investors concerned about a potential recession. The company’s management has cut its revenue and earnings guidance for fiscal 2023, citing macroeconomic factors and their potential impact on consumer spending.
Our detailed analysis of F5’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.
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2022 Inflation Shock
Timeline of Inflation Shock So Far:
- 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
- Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
- April 2021: Inflation rates cross 4% and increase rapidly
- Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
- June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
- July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
- Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.
In contrast, here’s how FFIV stock and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
FFIV and S&P 500 Performance During 2007-08 Crisis
FFIV stock declined from $38 in September 2007 (pre-crisis peak) to around $20 in March 2009 (as the markets bottomed out), implying FFIV stock lost over 45% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $53 in early 2010, rising 165% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.
FFIV Fundamentals Over Recent Years
FFIV revenues rose from $2.2 billion in 2019 to $2.7 billion in 2022, led by services and products revenues growth due to increasing demand for the company’s services and entry into new markets. Despite higher revenue, reported earnings decreased from $7.12 in 2019 to $5.34 in 2022 due to a decline in operating margins, which fell from 23.1% to 15.0% over this period due to higher expenses, including a rise in component costs. Our F5 Operating Income Comparison dashboard has more details.
Does F5 Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?
F5’s total debt rose from nil to $350 million in 2022, but as of the latest quarter, the company has cleared its debt. Its total cash decreased from around $1 billion to $0.7 billion over the same period, and it generated $510 million in cash flows from operations in the last twelve months. The company has no debt burden and a good cash balance, so it appears to be in a comfortable financial position.
With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe F5 stock has the potential for good gains once fears of a potential recession are allayed. That said, a possible decline in consumer spending and a steady fall in the company’s operating margins means it may take a while for F5 stock to reach its pre-inflation shock highs of over $248.
While FFIV stock looks like it has little room for growth, it is helpful to see how F5’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for F5 vs. Target.
With inflation rising and the Fed raising interest rates, among other factors, F5 stock has risen just 2% this year, underperforming the broader indices, with the S&P500 index up 11%. Can it drop from here? See how low F5 stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.
|S&P 500 Return||2%||11%||90%|
|Trefis Multi-Strategy Portfolio||1%||10%||248%|
 Month-to-date and year-to-date as of 6/2/2023
 Cumulative total returns since the end of 2016