Here Is Why F5 Networks’ Stock Price Has Surged Strongly In 2016

F5 Networks (NYSE:FFIV) stock is currently trading at $126, up by more than 30% from the levels at which it was trading at the beginning of the year. The company’s stock under performed in 2015, as investors remained concerned about F5’s sluggish revenue growth. A stagnating ADC market, high competition in the security market and a shift of applications to cloud based servers were likely the reasons for F5’s more sluggish growth.

However, the company’s stock price bounced back this year following reports that the company retained Goldman Sachs (NYSE:GS) to represent the company in the wake of apparent buyout offers. Further, starting Q4 2016, the company will start delivering its new line of products, which is expected to be completed by the end of 2016. This upgrade is likely to provide the much needed growth to the company’s products revenues, which has remained low of late in comparison to its service revenue.

F5 Networks Might Consider A Sell-Off This Time

In the past, F5 has surfaced as a potential acquisition target among the tech giants such as IBM (NYSE:IBM), Cisco (NYSE:CSCO) and Juniper (NYSE:JNPR). As is generally the case, neither Goldman  nor F5 would comment. Although no deal has arisen from any previous such talks, we believe F5 Networks might well consider a sell-out this time. This is due to the fact that F5’s revenue growth has likely been affected by cloud based services.

Until a few years ago, before the popularity of cloud based services, we were clear about the fact that the ADC market size was directly proportional to the number of web applications being deployed in corporate data centers. However, more and more applications are being deployed in the public cloud, where there is less need for a traditional load-balancer. For example, Amazon (NYSE:AMZN) uses elastic load balancing (ELB), which is used to distribute incoming application traffic across multiple Amazon EC2 instances in the cloud, for applications using Amazon Web Services. Other Cloud providers likewise have specific solutions.

Although F5’s load-balancer is customisable and is built on high-performance hardware, Amazon’s ELB is a bit different and it completely abstracts the hardware. Furthermore, the plus point for an Amazon ELB is that it wipes out the hassle of installing and customizing a dedicated hardware for load balancing, which is a must in case of BIG-IP based products. Going ahead, cloud based load-balancers may well disrupt the traditional application delivery controller market, which can largely affect F5’s revenue growth. This is one key reason as to why we forecast F5’s product revenue to grow in mid-single digits and not experience double digit growth over the next 5 years.

Upcoming Product Refresh Can Boost Revenues

F5 Networks is on its way for the hardware upgrade of its current line up of products. The company last underwent a significant product refresh in 2014, which boosted the demand for its BIG-IP platform and created new revenue growth opportunities. The company claims that its new appliances, named the Shuttle series, have significant performance improvements over its previous line of products. This upgrade should boost the company’s revenue in the near-term.

For information, please refer to our complete analysis for F5 Networks

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