F5 Networks, Inc. (FFIV): Time to Buy This Out-of-Fashion Tech Stock?

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The ADC market may be maturing, and thus only capable of supporting low single-digit growth in future.

F5 has significant revenues in the Governmental sector (see chart above), which may be challenged by austerity measures.

F5 generates very high gross margins of 83%, which may come under threat if competition increases while the market matures.

Smaller competitors like Radware Ltd. (NASDAQ:RDWR) are also seeing weak conditions.

F5 Networks, Inc. (NASDAQ:FFIV) described Citrix Systems, Inc. (NASDAQ:CTXS) as its No. 1 competitor “by a mile”. In contrast to F5, Citrix recorded strong growth of 46% in its networking and cloud revenues in its recent quarter. Moreover, on its conference call, Citrix Systems, Inc. (NASDAQ:CTXS) stated that NetScaler was the “major driver of growth in the quarter” for its networking division.

Not only does Citrix have the advantage of its relationship with Cisco Systems (as discussed above), but it also can bundle NetScaler with its market-leading desktop virtualization solutions. Indeed, it stated that this type of bundling deal was up 20% in the last quarter.

In comparison, Radware Ltd. (NASDAQ:RDWR) reported revenues and gross profits that were flat on the quarter. On its conference call, it stated that the underlying conditions were very good for the industry, but also talked of “some new platform pricing by some of the competitors that have simply brought down the average sale price.” If Radware Ltd. (NASDAQ:RDWR)’s commentary is accurate, then competition is increasing, and Citrix appears to be the big winner in 2013.

The bottom line

In conclusion, F5 Networks, Inc. (NASDAQ:FFIV) reported a better quarter, and the return of telco spending is a good sign. In addition, its guidance looks a bit conservative. By my calculations, the company has generated more than $467 million in free cash flow over the last four quarters, which puts it on a free cash flow yield of nearly 7% as I write. This is a generous valuation, as it seems that the market is pricing in a significant amount of doubt over its future cash flow growth.

While the stock is undoubtedly cheap, my hunch is that it could remain so until F5 gets back to reporting growth in its product sales, and it’s hard to get too excited about the stock until it does so.

The article Time to Buy This Out-of-Fashion Tech Stock? originally appeared on Fool.com and is written by Lee Samaha.

Lee Samaha has a position in Oracle. The Motley Fool recommends F5 Networks. The Motley Fool owns shares of F5 Networks. Lee is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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