F5 Networks (FFIV) is in a unique place right now. It has followed the market as a whole into bearish country. Unable to break through resistance, it dropped from 137 to 114 in May. But this company has incredible potential and as a long term investment, an investor should take notice of how "the cloud" has opened up huge potential for this company as individuals and businesses continue to thirst for more and more data.
Morgan Stanley has a buy note on F5 Networks and a price target of $155. They believe that gravitation toward Cloud Virtualization and Security will lead to increased revenue growth in 2013, beating estimates. and above consensus estimates. Wunderlich also issued a buy with a $145 price target as they see accelerating sales growth driving margin expansion. Capstone upgraded it from Hold to Buy with a $149 price target for the same reasons-higher sales and earnings growth.
There is an increasing need for security and data management processing in the "cloud" and this has been a boom for F5. It has struggled lately because of economic conditions - it does have a client base in the Telco Industry but those companies are tightening the spending reigns right now. But revenues were up 22.4% to $339.6 million which was ahead of analysts' consensus of $335.33 million. This 5.3% increase may be credited to trends within the cloud computing and virtualization. IT departments are getting help with the use off-website info storage and processing safely and this is helping businesses use cloud technologies. F5's revenue has doubled over the last five years.
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The Options Play
While the markets as a whole are bearish, I believe this and the fact it is an election year will keep potential clients for F5 tightening their purse strings. In turn, the markets may continue down for the short term with greater growth potential in the future quarters. With a solid base at 100, I believe the stock can move down farther before it rebounds. A bearish put spread here looks good.
- Buy a July 2012 put option with a strike of '105' (priced at $7.75)
- Sell a July 2012 put option with a strike of '100' (priced at $5.65)
- Net Debit to Start: $2.10
- Maximum Profit: $2.90
Reasoning behind the trade
- Very bearish market at the present-trade with the flow.
- Strong support at 100 is a good turning point.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
