F5 Networks: Should You Surrender After The Sell-Off?

Apr. 9.13 | About: F5 Networks, (FFIV)

F5 Networks (NASDAQ:FFIV) is the global leader in application delivery networking, improving the efficiency of the network of numerous companies. The company boasts that it provides its services to more than 90% of the top companies in almost every sector (banks, insurance, airlines, healthcare, automobiles etc.).

F5 Networks has exhibited exceptional growth since its foundation in 1996. In the last eight years, it has multiplied its earnings per share (EPS) by almost seven times, from $0.51 to $3.45, which corresponds to a compounded annual growth of 27%. I have intentionally left its first nine years out of the calculation because the company started really small and hence the growth till today would have been gigantic if it had been calculated. Moreover, F5 Networks essentially has no debt, as its cash hoard plus its receivables exceed its debt by $145 M.

Nevertheless, on April 5, the stock plunged almost 20%, from $90 to $73, as the company disappointed its investors, forecasting that its Q1 EPS will be much lower than the market expectations ($1.07 instead of $1.23). The big question is whether this is the end of the multi-year growth period for the company or just a temporary pause in its exceptional performance.

First of all, the announcement was indeed very disappointing but the projected earnings will be just equal to last year's earnings, which is not a disaster. Moreover, the revised expected revenue of $350 M is about 3% higher than last year's revenue. If the company just maintains its EPS of the last four quarters ($4.50), then its current price of $72 reflects a P/E ratio of 16, which cannot be considered high. Therefore, in the unfortunate scenario that the company does not manage to increase its earnings, its current share price is fully justified and close to its bottom.

On the other hand, even the most exceptional companies occasionally stumble and usually resume their growth after a pause period. For instance, even Coca-Cola (NYSE:KO) and McDonald's (NYSE:MCD) suffered temporary pauses during 2012 but they soon resumed their growth. Of course, F5 Networks cannot be compared to these companies; I mention them only to emphasize that a pause in growth can happen to any company. In my opinion, this is the most probable scenario for F5 Networks, which has exceptional past performance and is hard to believe that its growth will cease so suddenly.

It is also remarkable that the crash of its share price on Friday came with an exceptionally high volume, which was about $12 M or 15% of its total number of shares (or eight times the average daily volume). In my experience, when this occurs to a solid company, most of the sellers (those with a weak stomach) are gone and hence the buyers predominate in the following period. There are many examples of similar situations, such as the plunge of Yum Brands (NYSE:YUM) after the chicken scandal in China and the decline of Coca-Cola after its last earnings report. Both companies recovered very rapidly and already trade higher than they did before their bad news. I expect the same to occur in the case of F5 Networks, as it is a very solid company with no debt.

Conclusively, I consider the recent crash of the stock of F5 Networks as an excellent buying opportunity and I advise its shareholders to keep their shares. As mentioned in a previous article, the best opportunities arise when there is maximum fear in the market. An investor should just check whether the company has strong foundations or there is a permanent loss of its earning capacity. While the excessive past growth of F5 Networks may be difficult to sustain, I do not think that the company has suffered an irreparable damage and hence I expect its P/E to return to its previous levels as soon as the company resumes its growth.

Disclosure: I am long FFIV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.