F5's Software Transformation Continues in Q2 as Supply Chain Challenges Inhibit Systems Growth

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.