Taking advantage of some recent market weakness, we're going to purchase F5 Networks (FFIV); the firm's Application Delivery Networking (ADN) technology is used to manage data traffic between users and application servers in data centers.
The company continues to ride some strong secular tailwinds, such as the explosive growth of cloud computing, the build-out of virtual desktop infrastructure, and the growing use of smartphones.
Sitting at the front-end of traffic flows, F5's ADN solution can control and manipulate all types of data. That positioning has allowed the company to expand the kinds of solutions it offers and expand into areas like data center security, as well.
If F5 can get just a small percentage of the security IT market, then that could add some solid growth.
F5 shares took it on the chin after a negative earnings pre-announcement in early April, with the miss largely coming from weakness in the telecom sector.
The big question at the time was whether telecom operators were pushing orders back or if the dynamics of the market were changing. Given that F5 was (and still is) in the midst of a large product refresh cycle, we thought it was more likely the former reason, as companies tested new products and mulled over their options.
One of the main bearish tenants on F5 has largely focused on the impact Software Defined Networking (SDN) (virtual) would have on its business. F5 management has long maintained that SDN is overhyped and that it doesn't see it as fundamentally different than or as a threat to Application Networking now or in the future.
That said, F5 is not ignoring the SDN market, having acquired LineRate Systems, a developer of virtual application delivery controller (ADC) software with strength in the service provider and technology verticals, in February.
F5's hardware growth is indeed slowing, but that's because the focus is moving towards high-margin software due to virtualization in data centers and networks. Meanwhile, the company has solid incremental growth opportunities in security and even perhaps Toll Free Mobile Data, which we highlighted last month.
The stock has gotten very cheap. Excluding its over $17 per share in net cash, it is trading at 10x the FY14 (ending September) EPS consensus of $5.08. We rate the stock a "Buy" with a $100 target.
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