What a time it’s been for F5. In the past six months alone, the company’s stock price has increased by a massive 59.1%, reaching $474.15 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in F5, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is F5 Not Exciting?
We’re happy investors have made money, but we’re sitting this one out for now. Here are three reasons why FFIV doesn’t excite us, plus one stock we’d rather own.
1. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
F5’s billings came in at $939.5 million in Q2, and over the last four quarters, its year-on-year growth averaged 11.3%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect F5’s revenue to rise by 7.6%, versus its 5.4% annualized growth for the past five years. This projection is underwhelming and indicates its products and services will face some demand challenges.
3. Operating Margin in Limbo
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses — everything from the cost of goods sold to sales and R&D.
Looking at the trend in its profitability, F5’s operating margin might have fluctuated slightly but has generally stayed the same over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 24.5%.
Final Judgment
F5’s business quality ultimately falls short of our standards. Following the recent surge, the stock trades at 7.8× forward price-to-sales (or $474.15 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We’re pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at a top digital advertising platform riding the creator economy.
Stocks We Would Buy Instead of F5
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