Shares of F5 (FFIV 0.31%) jumped 6% on July 25 after the enterprise hardware and software company posted its latest earnings report. For the third quarter of fiscal 2023 (ended June 30), its revenue rose 4% year over year to $703 million and exceeded analysts' estimates by $3 million. Its adjusted earnings per share (EPS) grew 25% to $3.21 and cleared the consensus forecast by $0.35.
Those headline numbers were solid, but should you chase F5's post-earnings pop?
What does F5 do?
F5 was founded in 1996. It originally developed application delivery controllers (ADCs), used to balance server loads, but it subsequently expanded its ecosystem with security, automation, application delivery, and network access services. Today, more than 85% of Fortune 500 companies use its ADCs and software services to manage their networks, secure their applications, and digitally upgrade their businesses.
Image source: Getty Images.
Between fiscal 2002 and 2022, F5 grew its revenue at a compound annual rate of 17% from $108 million to $2.7 billion. Its stock has risen over 1,600% in the past two decades as the S&P 500 advanced about 360%.
But over the past five years, F5 stock has actually declined 7% as investors fret over its slowing growth. Revenue and adjusted net income growth have slowed to the low single digits.
Will F5's growth rates stabilize?
F5's revenue only rose 4% in fiscal 2022, down from 11% the previous year. It mainly blamed persistent macro headwinds, which forced companies to rein in their spending on software upgrades, as well as the chip shortage that throttled its shipments of ADC systems. Those obstacles have persisted through fiscal 2023.
|
Metric |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
|---|---|---|---|---|---|
|
Revenue growth (YOY) |
4% |
3% |
2% |
11% |
4% |
|
Adjusted gross margin |
83.2% |
81.4% |
80.4% |
80.4% |
82.5% |
|
Adjusted operating margin |
28.8% |
27.3% |
26.5% |
27.2% |
33.2% |
|
Adjusted EPS growth (YOY) |
(7%) |
(13%) |
(15%) |
19% |
25% |
Data source: F5. YOY = Year over year.
F5 expects its revenue to stay nearly flat year over year in the fiscal fourth quarter and rise about 4% to $2.8 billion for the full year. That near-term outlook is uninspiring, but the company is trying to stabilize its margins as its revenue growth cools off.
As the table illustrates, its adjusted gross margin expanded sequentially in the latest quarter as supply chain pressures eased and its pricing power improved. Its adjusted operating margin also expanded sequentially and year over year as it trimmed 9% of its workforce in April, reduced its executive bonuses, and benefited from lower tax rates.
Those cost-cutting measures enabled F5 to generate double-digit EPS growth over the past two quarters. It expects its adjusted EPS to rise another 20% to 25% year over year in the fourth quarter. That rosy outlook implies its full-year adjusted EPS will grow about 12% and improve significantly from its 6% decline in fiscal 2022.
Key Data Points
When a growth stock becomes a value stock
F5 was once a high-growth company, but its business is maturing. The global ADC market could still have a CAGR of 9.6% between 2023 and 2028, according to Mordor Intelligence. But it faces intense competition from diversified cybersecurity leaders like Fortinet, cloud software companies like Citrix, and networking companies like Juniper and Barracuda, which are already deeply entrenched in enterprise networks and data centers.
That's why analysts expect F5's annual revenue growth to remain in the low-single-digit range through fiscal 2025. That might be weak, but the stock also looks fairly cheap at 13 times forward earnings and 3 times this year's sales.
Yet Juniper, which is growing faster than F5, trades at just 12 times forward earnings and less than 2 times sales. Juniper also pays an attractive dividend yielding 3.2%, while F5 has never offered a dividend..
F5 might seem cheap, but it isn't a screaming bargain, especially when you can find superior blue chip tech plays in this market. That likely explains why its stock remains 35% below its all-time high. Even if the stabilization of its margins paves the way for stronger earnings growth in the future, I still don't think it's worth buying right now.
