F5 Networks, Inc. (FFIV), Citrix Systems, Inc. (CTXS): Do Not Always Pick the Low Hanging Tech Fruit

F5 Networks, Inc. (NASDAQ:FFIV) took a beating last week, seeing its stock tumble some 20% on disappointing earnings and a poor 2013 outlook, but is the news really all that bad? With the company’s positioning in an exciting and high growth industry, it’s tough not be intrigued, to not at least take a look at the stock. But I think the stock could be low for a reason.

Image: F5 Networks, Inc. (NASDAQ:FFIV)

Notable Headwinds

Fiscal first quarter sequential revenue growth was a mere 0.8%, which suggests that second quarter revenues will fall by 4.2% sequentially. Revised full year expectations put this year’s earnings equal to last year, with no growth.

Margins have began contracting, which is in part leading to poor EPS growth expectations.

A couple of F5 Networks, Inc. (NASDAQ:FFIV)’s largest customers account for 17% of revenues (Avnet Technology) and 14% (Tech Data).

The majority of weakness is in the telco space, which is F5’s largest segment (accounting for over 25% of revenues last year).

F5 Networks, Inc. (NASDAQ:FFIV) noted that the telco space has seen notable press related to delayed funding for several projects and hesitation related to sign new orders, thanks to budget constraints.

At the end of 2012 some 23 hedge funds were long the stock, with its top hedge fund owner being Lee Ainslie’s Maverick Capital, but the stock made up only 1.2% of its total 13F portfolio (see which hedge funds were dumping F5).


Piper Jaffray has also noted that F5 is losing market share in the application delivery controller market to the likes of Citrix Systems, Inc. (NASDAQ:CTXS). Citrix has a solid presence in the remote connectivity and work force productivity segment, with an increasing interest in cloud computing. In reality, Citrix offers investors a great way to invest in two high-growth verticals.

Last quarter results for Citrix showed 15% EPS growth year over year and a 7% beat of consensus expectations, managing to see over 15% growth across each of its four major segments, yet, the notable weakness from F5 could signal things to come for Citrix.

Both F5 Networks, Inc. (NASDAQ:FFIV) and major peer Citrix Systems, Inc. (NASDAQ:CTXS) have historically traded in line with each other. Of late, there is a large divergence, with F5 trading at 21 times earnings and Citrix at nearly 37 times.

What’s this mean? Either F5 is undervalued, or Citrix Systems, Inc. (NASDAQ:CTXS) is overvalued. I think Citrix will be the next shoe to drop in the industry. Industry headwinds will be too much to justify Citrix maintaining its premium valuation. The convergence of the two stocks’ multiples becomes even more likely when you consider the fact that they both have similar expected EPS growth (see below).

Industry Shakedown

As with any of the high-margin tech sectors, there are a number of competitors looking to get a piece of the market share. Cisco Systems, Inc. (NASDAQ:CSCO) makes and sells IP based networking products for communications. Cisco offers a complete line of routers and switching products for managing communications among local and wide area computer networks.