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These 3 Tech Stocks Plunged After Earnings: Buy the Dip?

By Herve Blandin - May 3, 2021 at 7:30AM

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Each company recently posted disappointing quarterly earnings despite having vast, and growing, market opportunities.

When you factor in the increasing digitization of enterprises and changes in consumer behavior, the tech industry is riding an ongoing breeze that is only going to grow over the long term. Despite these tailwinds, three tech companies recently reported disappointing quarterly results, sending their share prices lower.

Does this mark a slack in the sails, or is it just a lull before the next breeze begins? And if it is just a lull, Should investors buy the dip? Let's take a closer look.

1. F5 Networks: Applications optimization

The legacy tech player F5 Networks (FFIV -0.28%) proposes load balancing and cybersecurity solutions that distribute network traffic across servers to increase the performance and availability of applications. Given the shift to cloud computing over the last several years, the company has been converting its hardware-based, on-premises technology to cloud environments with software solutions.

3d man headache with an arrow graph down over white background.

Image source: Getty Images.

During the last quarter, revenue increased 10% year over year to $645 million, above management's goals.

However, the software segment grew only 20% year over year, way below the software growth in the range of 35% to 40% management had forecast at the end of last year for 2021 and 2022. In contrast, and surprisingly, the company's legacy business jumped 17% year over year.

According to CFO Frank Pelzer, customers prioritized short-term and quick solutions to support the increasing consumption of applications by growing their existing on-premises infrastructures instead of committing to more complex cloud migrations.

In addition, management slightly lowered the low end of its outlook for the current quarter because of the worldwide shortage of semiconductors.

As a result, the stock price dropped by 9.1% since the release of the results on April 27. F5 Networks stock is now trading at forward price-to-sales (P/S) and price-to-earnings (P/E) ratios of 4.4 and 18.2, respectively.

Given that modest valuation and taking into account the short-term nature of the company's setbacks in the context of the secular growth of its cloud application business, investors should consider buying the dip. 

2. Citrix Systems: Remote work

Like F5, Citrix Systems (CTXS 0.72%) posted disappointing quarterly results amid its transition from on-premises to cloud solutions.

The company provides remote work capabilities that allow employees to access a consistent work environment no matter where and how they access their applications. And during the coronavirus-induced lockdown periods last year, it proposed extra on-premises short-term licenses for customers looking to urgently accommodate extra remote work capabilities.

Management had anticipated converting these short-term arrangements into long-term cloud commitments, but that was not the case during the last quarter. Some customers did renew these short-term licenses, but with short-term contracts again, which involved lower-than-expected revenue because of revenue recognition rules under generally accepted accounting principles (GAAP). As a result, during the first quarter, revenue declined 10% year over year to $776 million -- $10 million below the midpoint of management's guidance range. 

The hesitation from customers seems to be temporary, though. The pandemic isn't over yet, and companies are still facing uncertainties with their long-term work-from-home plans.

In any case, the stock price dropped by 10.6% since the news last week, and the market values Citrix at reasonable forward P/S and P/E ratios of 4.6 and 20.2, respectively. Since the company's long-term prospects remain intact, investors who were looking to buy the stock on the dip should consider taking advantage of this opportunity.

3. Limelight Networks: Content delivery network

In contrast with F5 and Citrix, Limelight Networks' (LLNW -0.43%) situation seems worrying.

The company developed a computing infrastructure to accelerate the delivery of online services. It specialized in video streaming capabilities, which should profit from the cord-cutting trend and the launch of many video streaming services since last year. 

Yet during the last quarter, revenue declined 10% year over year because of pricing pressure and poor execution. Management expects full-year revenue to decline by 2.3% year over year, based on the midpoint of its revenue guidance range of $220 million to $230 million. 

During the earnings call, new CEO Bob Lyons explained that the company's loss of focus caused poor network performance. Such a development should alarm investors, as network performance is core to Limelight Networks' business. In addition, lower revenue involved lower gross margin and deeper net losses compared to the prior-year quarter because of the fixed costs of the company's computing infrastructure.

As a result, the stock price dropped by 13.8% following the news.

Looking forward, Limelight Networks plans to optimize its infrastructure and propose extra services to improve its results, but it's facing strong competition against fast-growing content delivery network specialists such as Fastly and Cloudflare

Thus, despite the company's apparently low valuation at a forward P/S ratio of 1.8 in its attractive market, investors should consider staying on the sidelines as long as operational challenges persist.

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Stocks Mentioned

F5 Networks, Inc. Stock Quote
F5 Networks, Inc.
FFIV
$152.75 (-0.28%) $0.43
Citrix Systems, Inc. Stock Quote
Citrix Systems, Inc.
CTXS
$96.84 (0.72%) $0.69
Limelight Networks, Inc. Stock Quote
Limelight Networks, Inc.
LLNW
$2.30 (-0.43%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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