As I circled through the leading stock charts last night I was struck how narrow the relative strength is. The only subsector in tech that has any life is "anything that touches cloud computing."
While I believe in the concept, and I own multiple names in it, I am a bit bemused that stocks like Riverbed Tech (RVBD) and F5 Networks (FFIV) have suddenly become "cloud" plays - I've owned both, on and off, for many years and they are 'networking' stocks. But attach the tag 'cloud' and I guess your valuation can double.
Even an old dog like Citrix Systems (CTXS) now has reinvented itself as a cloud play, and lo and behold I saw it among the leadership stocks.
Eventually - maybe in 6 months, or 36 months - this valuation premium is going to drop out of these names, as Wall Street loves to find a story and then go to the extreme. That does not mean cloud computing is not real or a decisive driver, but one needs to worry when the love affair starts to reach 'stalker' levels... which is what we can now see in this subset of 10-12 names.
With that said, Investor's Business Daily does its normal excellent "easy enough for anyone to understand" write up, this time on F5 Networks so it is worth sharing, even as fundamentals have taken a back seat to staring at squiggly lines on charts. I have taken profits on almost the entire position, and am waiting for a more opportune entry point to rebuild the stake. Hopefully that gap can fill which would be a nice place to return in size. (Click to enlarge)
- F5 Networks has become one of cloud computing's biggest beneficiaries, revving up earnings and widening its lead over bigger rivals by helping make network-delivered software faster and more reliable. F5's products help customers balance workloads among servers in data centers while screening network traffic and encrypting data.
- The Seattle-based company dominates an obscure but crucial $1-billion market for application delivery controllers, and that lead has driven up its stock price by 64% this year to an all-time high around $87 per share.
- Application delivery controllers, or ADCs, are hardware appliances that connect to corporate networks. Resembling pizza boxes, the devices come with built-in software that analyzes network traffic to help applications delivered over networks run better and more securely.
- ADCs have become more vital due to the rise of cloud computing, a trend that offers software and other computing resources via remote data centers rather than from expensive on-site systems. Mobile devices are boosting data traffic as well, says F5 CEO John McAdam. "There is much more complexity in the network and in the movement of network traffic, so we're gluing the whole thing together within the data center," McAdam said. "You could say we're the glue that holds the data center together."
- In the January-to-March period, F5's sales from ADCs grew 12.5% over the prior quarter to $126.4 million, according to Gartner. In that same period, second-ranked Cisco Systems' (CSCO) sales from ADCs shrank 8.6% to $64 million. The market's third-largest vendor, Citrix Systems, saw ADC sales fall 15% to $30.4 million.
- F5 is gaining ground because it has the market's only products that can analyze network traffic without bogging it down, according to Brian Marshall of Gleacher & Co. "That's key, because slowing the data throughput decreases the overall efficiency of the network," Marshall said.
- F5's operating profit margins are around 34%, and its gross margins of 81% are "the envy of the industry," Marshall says.
- F5 plans to roll out a range of new products in the coming 12 months to further extend its technology lead, McAdam says. Promising roll-outs include additions to its TMOS (traffic management operating system) platform and the latest Viprion model of ADC, which has a flexible chassis design that lets users easily increase capacity by adding more hardware 'blades.'
- But how long can F5 dominate? Cisco, Citrix and another market rival, Radware (RDWR), are all attempting to lure customers away with lower-cost ADCs. F5's will have a tough time maintaining its high gross margins, analyst Marshall contends. A weak global economy could also drag down spending on data center upgrades over the next six to 12 months.
[Jul 22, 2010: F5 Networks Earnings]
[Apr 22, 2010: F5 Networks Results Solid, but Market Expectations High]
[Jan 22, 2010: CEO Interview with F5 Networks]
[Jan 21, 2010: F5 Networks Executing Well]
[Apr 8, 2009: Stimulus Fire Hydrant (Worldwide) Should Benefit Networking Companies/Broadband]
Disclosure: Long F5 Networks in fund; no personal position