F5 Is Widening Its Competitive Advantage
Customer switching costs will keep rivals at bay.
F5 Networks (FFIV) has effectively leveraged its first-mover advantage in server load balancing to build a business that possesses structural competitive advantages, primarily customer switching costs. Its financial performance rivals that of dominant software vendors. F5 generates very high returns on capital thanks to the significant amount of software content embedded in its appliances, its large base of high-margin maintenance service revenue streams, which are recurring in nature, and the relatively small amount of capital needed to run the business. F5's stable and strong market share, increasing customer penetration, and strong services revenue growth also point toward a narrow economic moat. Although we recently upgraded our moat rating to narrow from none and increased our fair value estimate to reflect our more optimistic long-run view of the business, we believe the shares are currently overvalued.
F5 Is Essentially a Software Company
F5's products, services, and business model support industry-leading returns on invested capital. F5's core products are its application delivery controllers. ADCs can perform a variety of tasks related to delivering and securing software applications, but their core function is server load balancing. This process distributes traffic load more evenly across Web servers to ensure that the end user receives the best experience possible when visiting a website or using a software application.
Grady Burkett does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.