F5 Networks Under Continued Pressure From Acopia Acquisition

Shares of networking equipment vendor F5 Networks (FFIV) were down nearly 8% Tuesday morning, at $66.62, following a 13%-drop Monday after the company Monday said that it will buy startup Acopia Networks for $210 million in cash. It’s F5’s first acquisition since it bought Swan Labs in September of 2005.

Analysts are rushing to F5’s rescue, saying the dip is a buying opportunity:

C.E. Unterberg Towbin’s Gabriel Levy Tuesday morning upgraded the stock to Buy from Market Perform, writing, “We believe the sharp drop in the shares is an overreaction that reflects skepticism about management’s ability to successfully execute on its diversification into a new market in the data center.” Nonetheless, his estimates are going down, with the Acopia buy diluting earnings (excluding some costs) in the fiscal year ending Sept. 2008 by 5%, from $2.49 to $2.18 — even though sales will be higher than he’d originally thought by $30 million, at $690 million for next year. Levy’s also lowering earnings in the out years, with 2009 going from $3.07 to $2.94, though earnings come up in 2010, with $3.82 per share instead of a prior estimate of $3.69. Bottom line, however, Levy is reducing his 12-month price target, or “fair value estimate” to $88 from $96.

W.R. Hambrecht’s Ryan Hutchinson Tuesday re-iterated his Buy rating on the stock, urging investors to go into the sell-off, and he’s holding onto his $94 price target on the stock! Hutchinson takes substantial time to delve into the technology, ticking off the virtualization benefits: “From a user perspective, Acopia’s products are essentially switches that optimize unstructured data delivery from storage servers to end users […] From an end user perspective, files appear in one virtual pool rather than a physical location and can be retrieved at an accelerated rate.” The acquisition’s dilution, moreover, hardly seems to matter, as Hutchinson’s high estimate for next year’s profit, $3.42, comes down to $3.13, which is still substantially above a mean estimate of $2.52 for next year.

Words of caution come from Signal Hill Capital Group’s Eric Suppiger, who has a Hold on the stock, and who is also lowering his numbers, though they’re still higher than Levy’s, with an estimate for profit next year of $2.96, down from $3.22. Suppiger’s main concern is that while the product line offers opportunities, it doesn’t integrate with something called the “BigIP,” which is F5’s main revenue driver. On the one hand, the way Suppiger describes it, Acopia’s technology is right in line with the “virtualization” craze sweeping industry: “The company’s products decouple file access from physical file location thereby giving users and applications access to files regardless of physical location. Acopia’s file virtualization also provides greater freedom to move data or change storage technologies without disrupting applications.” At the same time, however, “[The] acquisition has considerable near term risk we think as Acopia’s product is not planned to integrate with F5’s BIGIP switch or TMOS operatin system.” He goes on, “With products from F5’s past three acquisitions (Swan Labs, MagniFire and uRoam) generating less than 10% of product revenues, we feel F5 has not demonstrated a strong capacity to integrate acquired companies and technologies.”

All these estimates, by the way, are using the existing share count of around 43 million shares, but that will change this month as F5 completes a previously announced two-for-one stock split.

F5 has a rich multiple, all three analysts note, trading in a range of 24x to 33x forward earnings, depending on whether one looks at reported earnings, non-GAAP earnings (excluding stock option expense), and whether one looks at calendar year earnings or fiscal year (ending September) earnings.