Monday, November 2, 2020

A Small Cap Equity holding: F5 Networks, Inc. (FFIV, $133.57): “Traveling Up with Software in the Clouds” by: Grace Flynn, AIM Student at Marquette University

F5 Networks, Inc. (FFIV, $133.57): “Traveling Up with Software in the Clouds”

By: Grace Flynn, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


• F5 networks, inc. (NASDAQ: FFIV) engages in software for development and provision of defined application services. The company have two business segments, services (56% of revenue) and products (44% of revenue) focusing on delivery, application, and performance for networks. It mainly operates in United States (50.7% of revenue), China, Japan, and Germany. 

• F5 has increased their revenue in the past quarter and growth percentage by $24.4 M in revenue and +4% growth due to an increase of 52% in their software sales. 

• F5 announced in its latest earnings call that they are on their way to becoming a software led business led by cloud application security. 

• Management introduced new AI-powered solution that blocks fraud missed by technologies to increase customer base and customer satisfaction.

• Shares rose by 4.3% indicating better results than the street expected due to management guidance of software and cloud systems. 

Key points: The Covid-19 pandemic has demonstrated great demand for software and application delivery due to increased use of online traffic and stay-at-home orders. F5 has embraced this opportunity with increasing their software sales by 52% accounting for most of the revenue growth for the quarter. This resulted in a 6% increase in product revenue year-over-year and software revenue grew 36%. The service segment was 5% of their revenue growth. F5 has made efforts to focus of their hardware security system which is a reason why their software sales have increased by so much. Their hardware and software security continues to increase during the pandemic and is one of the reasons that F5 is able to reach several geographies. 

During their Q4 earnings call on October 26, 2020, management discussed moving this business to a more software-lead business based on these past quarter results. They experienced a decline of -10% in their system business but this was offset by the strength of their software business. By providing multi-cloud application security in their software, their software product was their main driver in 2020 as reported 5% of GAAP and non-GAAP revenue growth. They are currently working on innovating and investing to keep this software momentum going for the future by using a diversified base of subscription and SaaS revenue. 

In addition to software innovations, management has announced new innovations to block fraud and increase the satisfaction of their customers. They introduced this innovation, Shape Al Fraud Engine (SAFE), in October in order to eliminate fraudulent transactions from getting past current fraud tools. By using artificial intelligence, these engines can do a complete evaluation of the transactions to implement preventative controls and catch fraud before it is too late. SAFE is now available for applications. 

Recently, shares of F5 networks rose 4.3% topping expectation for the future. Their revenue was reported $615 M which matched the management’s guidance range of $595-$615M for the quarter. This can be explained to more personalized software systems and innovation within their own management in order to increase their revenue and shares during the pandemic. 

What has the stock done lately?

In the past month, F5’s stock price rose 8% from $122.77 to $133.2. On October 27, this price reached a high of $136.26 which outperformed the market and the street’s estimates for the quarter. They also outperformed some of their top competitors such as Cisco Systems Inc. and Juniper Networks Inc. Their 52-week range is currently at a low of $79.78 and at a high of $156.36. They did have a drop in price this month but was able to combat that and is currently trading at $133.57. 

Past Year Performance: In the past year, F5 has price has dropped from $146.10 to $133.57. F5 is currently underperforming when compared the Russel 2000 and YTM return for F5 Networks is down -7.09%. Their 52-week range is currently at a low of $79.78 and at a high of $156.36. Their biggest increase was late July with a price of $154.84 which was the highest for the year. 

Source: FactSet 

My Takeaway

F5 Network’s current stock performance has had some drawbacks, but management has recently made many initiatives for growth in the future. Underperforming against the Russel 2000 could be an indicator for loss, but the latest quarter’s result indicates increasing revenue and increased competitor advantage. New innovations to move this company into a more software and cloud-based companies gives the company an opportunity for expansion of their customer base and revenues. 2020 Q4 revenue growth of 4% indicates positives returns for the upcoming year, even though the company has suffered during 2020. Increasing their software products will drive their product segment to be majority of their revenue giving them the chance to offset the consequences of the Covid-19 pandemic. Therefore, I recommend a hold considering last quarter results. 

Source: FactSet