Company Reports

We are maintaining our $205 fair value estimate for narrow-moat F5 after the firm closed out the second quarter of fiscal 2024 with financial results roughly in line with our prior forecasts. While macro pressures continue to weigh down customer budgets, the firm continues to see stabilization in customer demand after a tough 2023. As in previous quarters, we remain impressed by the firm’s focus on profitability during the current period of macroeconomic uncertainty. We believe investors were left unimpressed with F5’s guidance for the upcoming quarter, resulting in the firm’s shares selling off sharply after its earnings report. While quarterly guidance implies a tough demand environment, the selloff is overly punitive. With the company’s shares trading down after hours, we view them as undervalued.

F5 is a leader in application delivery controllers, or ADCs, sells to enterprises, service providers, and government entities. F5 has long been the market share leader for hardware-delivered ADCs, but due to a change in consumption preferences, successfully pivoted to a software-focused business model. We think the company is well positioned to remain the share leader in hardware ADCs while competing in the higher growth software market and grow along with SaaS, application, and edge security over the next decade.

We are raising our fair value estimate to $205 per share from $180 per share for narrow-moat F5 after the firm began fiscal year 2024 materially outperforming our expectations for revenue and earnings. While customer budgets have not normalized, management has seen more predictable demand and almost no late cancelations or extra approval layers in recent deals. We think F5’s top line is positioned to accelerate. The market agreed with our sentiment in afterhours trading, sending shares up about 9%. We view shares as fairly valued at current prices and think F5 is an interesting name to monitor over the next few quarters.

F5 is a leader in application delivery controllers, or ADCs, sells to enterprises, service providers, and government entities. F5 has long been the market share leader for hardware-delivered ADCs, but due to a change in consumption preferences, successfully pivoted to a software-focused business model. We think the company is well positioned to remain the share leader in hardware ADCs while competing in the higher growth software market and grow along with SaaS, application, and edge security over the next decade.

We are raising our fair value estimate to $180 per share from $170 for narrow-moat F5 after the firm closed its fiscal year on a mostly positive note. While the demand environment has yet to normalize, management called out signs of demand stabilization as some enterprise customers, that had previously been extending the use of assets beyond typical durations, resumed hardware purchases. While its top line would continue to be muted in the near term, F5 has successfully demonstrated operating leverage in terms of gross margin improvements from selling more software, operating discipline, as well as previous cost-cutting measures. Despite revenue headwinds, we are pleased with F5’s ability to produce profitability under difficult conditions. Our fair value increase is a result of our model roll for the fiscal year end and our positive consideration of F5’s operating flexibility. While we view shares as undervalued, we’d ask investors to tread with caution as F5’s customers continue to scrutinize spending in times of macroeconomic uncertainty.

We are maintaining our $170 fair value estimate for narrow-moat F5 after the firm reported third-quarter financial results largely in line with our expectations. While the firm has navigated a tough macro environment over the last few quarters, management highlighted early signs of demand stabilization, a positive indicator for upcoming quarters. Results, coupled with the easing macro pressures, appeared to impress investors, as shares jumped more than 10% afterhours. Following the afterhours pop, F5’s shares are now trading in 3-star territory and we view them as fairly valued.

F5 is a leader in application delivery controllers, or ADCs, sells to enterprises, service providers, and government entities. F5 has long been the market share leader for hardware-delivered ADCs, but due to a change in consumption preferences, successfully pivoted to a software-focused business model. We think the company is well positioned to remain the share leader in hardware ADCs while competing in the higher growth software market and grow along with SaaS, application, and edge security over the next decade.

We are lowering our fair value estimate for narrow-moat F5 to $170 per share from $199 after second-quarter results largely met our expectations, but fell materially short regarding the outlook for the remainder of the fiscal year. Macroeconomic factors continue to weigh heavily on F5’s product revenue, particularly its software revenue, which we believe to be the largest growth driver for the firm. As a result of a difficult macroenvironment, with heightened budget scrutiny, deferred projects, and customers sweating out existing assets, management lowered its revenue guidance for the full year.

We maintain our $199 fair value estimate for narrow-moat F5 after its first-quarter results for revenue met consensus estimates and adjusted earnings per share exceeded estimates. Macroeconomic factors have created budget and project scrutiny, which, in turn, have weighed on F5’s product revenue, particularly hindering new software sales growth. However, we are pleased with management’s proactive steps taken to navigate this period of heightened uncertainty. F5 has re-engineered several of its products to reduce its dependence on an increasingly expensive broker market and avoid margin-dilutive expedite fees. After results were reported, shares traded down over 4%, which we believe is in reaction to disappointing results in its software products during the quarter. Although the 3% growth in software is a significant disappointment, management’s outlook of 15%-20% in fiscal year 2023 for software growth was maintained. As such, we still view shares as undervalued and believe the immediate market reaction is overly punitive.

We maintain our $199 fair value estimate for narrow-moat F5 after its fourth-quarter results slightly exceeded our expectations for revenue and adjusted earnings. We remain confident in F5’s plan for growth and margin expansion by expanding its software and application security portfolio. After releasing results, shares traded down over 4%, which we believe is the result of margin contraction. We view this as an overreaction when considering the contraction is predominantly the result of increased component and expedite costs from the broker market. There was also continued demand for its systems products, and despite a significant order backlog, F5 has seen extremely few to no order cancellations. We view shares as undervalued and expect to see F5 work down its order backlog through the first half of its fiscal 2023 while continuing to grow its margin-accretive software business.

F5 is a leader in application delivery controllers, or ADCs, sells to enterprises, service providers, and government entities. F5 has long been the market share leader for hardware-delivered ADCs, but due to a change in consumption preferences, successfully pivoted to a software-focused business model. We think the company is well positioned to remain the share leader in hardware ADCs while competing in the higher growth software market and grow along with SaaS, application, and edge security over the next decade.

We are lowering our fair value estimate for F5 down to $199 from $210 to reflect our more conservative stance on long-term profitability assumptions, but we maintain our narrow moat rating. Our new fair value estimate still remains solidly above the company’s current share price. We continue to believe that the market has been overly punitive to a high-quality name in response to recent macroeconomic events and view F5 shares as undervalued.

F5 is a leader in application delivery controllers, or ADCs, sells to enterprises, service providers, and government entities. F5 has long been the market share leader for hardware-delivered ADCs, but due to a change in consumption preferences, successfully pivoted to a software-focused business model. We think the company is well positioned to remain the share leader in hardware ADCs while competing in the higher growth software market and grow along with SaaS, application, and edge security over the next decade.

We maintain our $210 fair value estimate for narrow-moat F5 after its third-quarter results exceeded expectations for adjusted earnings as well as revenue. While F5 continues to combat supply chain challenges and an uncertain macroenvironment, its continued efforts to shift organizations to software subscriptions is paying off. After releasing results, investors in after-hours trading reacted positively, with shares gaining as much as 15% before coming back down to around a 6% gain. We view shares as undervalued, and management reiterated that it anticipates the first quarter of fiscal 2023 will be the low point in systems revenue. We think that the recurring revenue F5 continues to expand upon (72% of total revenue from 66% in the year-ago period), coupled with margin expansion when systems revenue returns to normal levels, will have the company in a strong position to capitalize on the essential nature of F5’s product offerings for organizations.

F5, a leader in application delivery controllers, or ADCs, market sells to enterprises, service providers, and government entities. More than half of F5's revenue comes from selling support and maintenance services for its products. Mission-critical ADCs manage the uptime, delivery, and security of applications and network traffic flow. Growth in public cloud-based workloads caused a decline in the on-premises ADC hardware required and shifted ADC demand to software-based solutions. In our view, F5 was slow to embrace cloud-based workloads as it perilously defended its incumbent offerings, but a revamped management team properly pivoted F5's focus toward software and cloud-based products as growth catalysts to supplement its legacy hardware dominance, and we think the firm is set to thrive.

We are lowering our fair value estimate for narrow-moat F5 to $210 per share from $220 after its second-quarter results topped our expectations for adjusted earnings, but revenue growth came in lower than we expected. F5 is anticipating persistent supply chain challenges will affect its systems business for the next three quarters. Our valuation decrease stems from expecting a longer-term impact on systems while F5 works on shifting organizations to software. Nonetheless, with shares selling off by about 10% in after hours, due to F5 lowering its fiscal year 2022 outlook, we view shares as undervalued and expect that F5 is nearing the trough before margins expand due to systems production ramping back up and software growth continuing. We think that F5 remains an essential part of organizations' operations in supporting legacy and modern application delivery and security concerns across hybrid- and multicloud environments, which creates solid long-term demand drivers.

F5, a leader in application delivery controllers, or ADCs, market sells to enterprises, service providers, and government entities. More than half of F5's revenue comes from selling support and maintenance services for its products. Mission-critical ADCs manage the uptime, delivery, and security of applications and network traffic flow. Growth in public cloud-based workloads caused a decline in the on-premises ADC hardware required and shifted ADC demand to software-based solutions. In our view, F5 was slow to embrace cloud-based workloads as it perilously defended its incumbent offerings, but a revamped management team properly pivoted F5's focus toward software and cloud-based products as growth catalysts to supplement its legacy hardware dominance, and we think the firm is set to thrive.

We are maintaining our $220 fair value estimate for narrow-moat F5 after its first-quarter revenue growth was in line with, and adjusted earnings were higher than, our expectations. While the quarter was generally strong, F5's shares were battered in afterhours trading, falling 13% to $192, due to F5 lowering its expectations for fiscal 2022 revenue growth due to supply chain challenges. The second-quarter guidance was much lower than our expectations; however, we believe this is a near-term issue that could create an attractive entry point for long-term investors. We think the demand for solutions that enable application delivery and secure applications have strong durable tailwinds, and that the second-quarter and fiscal 2022 guidance decline are solely due to not being able to build and supply systems. We believe F5 possesses robust customer switching costs as an essential part of the networking and security for organizations and that potential customer attrition will be muted as the entire industry works through challenges in procuring networking chips, and that revenue growth will snap back as F5 works through its backlog.

F5, a leader in application delivery controllers, or ADCs, market sells to enterprises, service providers, and government entities. More than half of F5's revenue comes from selling support and maintenance services for its products. Mission-critical ADCs manage the uptime, delivery, and security of applications and network traffic flow. Growth in public cloud-based workloads caused a decline in the on-premises ADC hardware required and shifted ADC demand to software-based solutions. In our view, F5 was slow to embrace cloud-based workloads as it perilously defended its incumbent offerings, but a revamped management team properly pivoted F5's focus toward software and cloud-based products as growth catalysts to supplement its legacy hardware dominance, and we think the firm is set to thrive.

F5, a leader in application delivery controllers, or ADCs, market sells to enterprises, service providers, and government entities. More than half of F5's revenue comes from selling support and maintenance services for its products. Mission-critical ADCs manage the uptime, delivery, and security of applications and network traffic flow. Growth in public cloud-based workloads caused a decline in the on-premises ADC hardware required and shifted ADC demand to software-based solutions. In our view, F5 was slow to embrace cloud-based workloads as it perilously defended its incumbent offerings, but a revamped management team properly pivoted F5's focus toward software and cloud-based products as growth catalysts to supplement its legacy hardware dominance, and we think the firm is set to thrive.