A10 Networks: Should You Be Interested?

A10 Networks might appear to be a good post-IPO opportunity, but investors must ask themselves how its priced and performs relative to the competition.

Mar 24, 2014 at 9:30PM

A10 Networks had its IPO last Friday, and with gains of 8%, most would consider it a rather successful debut. However, is it presenting a good investment opportunity, or are competitors like F5 Networks (NASDAQ:FFIV), Radware (NASDAQ:RDWR), and Alcatel-Lucent (NYSE:ALU) a better value?

What's A10 do?
A10 creates software-based products to improve data-center applications and network performance. It provides three different types of software-based application networking solutions: applications delivery controllers, or ADC, carrier-grade network address translation, or CGN, and distributed denial-of-service threat protection, TPS.

It is in these three areas of concentration where value -- or a lack thereof -- can be identified in shares of A10.

With that said, A10 has sold products in more than 60 countries and earned roughly half of its revenue last year in the U.S. The company grew revenue by 17% last year, creating $141.7 million, and a net loss of $27.1 million. However, A10 has accumulated significant legal costs due to litigation with Brocade, in which A10 made a cash payment of $75 million last year. The company said in its S-1 that net losses were a result of this litigation. Otherwise, A10 would be slightly profitable.

So should you buy it?
With the Brocade litigation over, and A10's growth accelerating to an average of 25% in the last two quarters of last year, the big question is whether it now makes a good investment?

To answer this, understand that ADC is the heart and soul of A10's business. This is the segment where A10 believes it's well-positioned and has a superior solution. Its ADC business optimizes data-center performance with the company's application products; it is this business that cost the company $75 million in its patent-infringement suit with Brocade.

CGN and TPS are smaller units, but important to the company's long-term growth prospects. A10 provides CGN services for address and protocol translation to service providers, and it competes with Alcatel-Lucent. In TPS, A10 provides networkwide security, competing with Radware, which has been a popular space over the last couple years.

With all things considered, A10 looks like a fairly well-diversified company, but as previously said, ADC is the bulk of its business, and more than 40% of its annual revenue comes from 10 customers. Not to mention, with $141.7 million, A10 is still a small fish in a big pond, spreading its revenue across three units where market leaders already exist.

Specifically, following its IPO, the company is now valued at more than $950 million, meaning it trades at nearly seven times sales. In comparison, F5 has revenue of $1.5 billion, trades at 5.6 times sales, and has an operating margin of 28%. Radware, which is A10's TPS competition, is also small, with revenue just shy of $200 million. However, Radware is growing at a steady 10% pace. At just 18 times next year's earnings, it is not too pricey, either.

Lastly, Alcatel-Lucent does operate in the CGN space, but with nearly $20 billion in annual revenue, it operates in many other segments, as well. It is not a pure play on the CGN industry, but rather a well-diversified investment in all things telecom equipment. Not to mention, Alcatel's margins continue to improve and at 0.5 times sales. It is very cheap.

Final thoughts
There are many who might be attracted to A10, given the enormous five-year 450% return from F5.

Yet, collectively, F5, Alcatel-Lucent, and Radware look like solid investments in IT services, telecom equipment, and enterprise software. F5 continues to grow at 15% annually, and given its margins, appears to be a far better investment. Looking among these companies, F5 looks best, and A10 does not yet look like the next F5.

Editor's Note: This version has been amended to correct A10's legal settlement. Motley Fool apologizes for the error.

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Brian Nichols owns shares of Alcatel-Lucent (ADR). The Motley Fool owns shares of F5 Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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