Despite the recent rebound in the markets, September ended with a resounding thud, with the final few days of the tumultuous quarter ending with a widespread crash of tech and momentum stocks. Even market leaders such as Apple (AAPL: Charts, News, Offers) and Baidu (BIDU: Charts, News, Offers) were tossed out as hedge and mutual funds liquidated their positions in high-beta stocks in the face of economic uncertainty entering earnings season. Technology stocks have been hit the hardest, but long-term investors should take a look at several beaten up tech stocks that now trade at reasonable valuations. One such stock is former high-flier F5 Networks (FFIV: Charts, News, Offers). F5, a provider of network application delivery, has seen its shares slide from a 52-week high of $145.76 to approximately half of that value in eight months. Shares now trade at a reasonable 17 times forward earnings and 27 times trailing. F5 shares also have a reasonably strong support line at around $70.
Daily Chart
F5 Networks’ business of application delivery is somewhat opaque to most investors, who will at first glance likely compare the company to beleaguered networking industry leader Cisco (CSCO: Charts, News, Offers). In actuality, F5′s business is application delivery controllers (ADCs) – virtual (hardware and software) “telephone operators,” positioned at the front of the company’s servers to direct and route network traffic in the most efficient paths possible. The ADCs are used to balance loads, enhance security, optimize connections as well as speed up wireless network connections for easy access to cloud based servers. In short, they are the brains of a company’s networking nervous system.
F5′s products, categorized in Layers – mainly focusing on Layer 4 to Layer 7 server switches – which are designated by speed, encryption and compression. F5 currently dominates the L4-L7 market with 50% of the market. Layer 7 switches are becoming the de facto standard of cloud computing and virtualization, which put it at the forefront of the cloud computing revolution that Google (GOOG: Charts, News, Offers), Oracle (ORCL: Charts, News, Offers), Microsoft (MSFT: Charts, News, Offers), Amazon (AMZN: Charts, News, Offers) and Apple are all fighting tooth-and-nail to claim. Over the past several years, the company has doubled its market share of Layer 4 to Layer 7 server switches, operating in a niche market that is immune to most of the volleys fired between the cloud computing giants such as Dell (DELL: Charts, News, Offers), Cisco, IBM (IBM: Charts, News, Offers) and Hewlett Packard (HPQ: Charts, News, Offers). Enterprise customers are likely to increase adoption of F5′s essential products to increase network efficiency, security and cost efficiency.
The analyst consensus for EPS growth in the fourth quarter is a conservative 24%. If F5 manages to top that on October 25, investors today should get a nice lift from its current lows. The company’s PEG ratio of 0.91 also seems ridiculously cheap for a growth tech stock. In addition, F5′s niche market and market cap of $5.9 billion makes it a likely takeover candidate for many of the larger players in the networking market. By comparison, Cisco and Oracle have market caps of $85 billion and $148 billion, respectively. F5 also has new products set for release in 2012, such as the mid-range VIPRION 2400 chassis, a new version of its TMOS software (its operating system) as well as other new virtual appliances. S&P forecasts 20% sales growth in 2012, even with the looming prospects of a European collapse and a double dip recession. In addition, S&P forecasts that gross margins will rise to 82% in fiscal 2012, and operating margins will increase to 39%. If the global economy actually survives the chaos in Europe and Washington, then these numbers will be substantially meatier.
Other News About FFIV
Jefferies Analysts Now Covering F5 Networks
F5 gets some much needed analyst attention.
Jim Jubak is bullish on F5.
Other Stocks in the News
Accounts probe dents Chinese stocks in US
Legitimate names get crushed as rumors hurt Chinese stocks.
Cisco Announces Major Changes in its Enterprise Videoconferencing
Cisco makes some changes, but will it ever get out of its rut?
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
