VALUATION HIGHLIGHTS
- Services constitute 59% of the Trefis price estimate for F5's stock.
- Application Delivery Network constitutes 35% of the Trefis price estimate for F5's stock.
WHAT HAS CHANGED?
- F5 Stock vs. S&P 500 Performance
The increase in FFIV stock over the recent years have been far from consistent. Returns for the stock were 39% in 2021, -41% in 2022, 25% in 2023, and 41% in 2024. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, 24% in 2023, and 23% in 2024 — indicating that FFIV underperformed the S&P in 2022.
- Q1 2025 earnings
F5 Inc. delivered upbeat Q1 2025 (ending December 2024) results, with the company's EPS increasing to $3.84 from $3.43 in the prior-year quarter. F5's revenues grew 10.5% y-o-y to $766 million in Q1'25. The top-line rose due to a 22% jump in the software revenue, while its systems segment saw an 18% rise.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Services Growing At A Faster Pace
- F5's Service Revenue: We project F5's services revenue to continue its growth at a mid-single-digit average annual rate in the coming years, consistent with the trend observed over the past five years. However, if demand exceeds our expectations and this revenue segment grows at a high-single-digit average annual rate, it could result in a 10% upside to our F5 price estimate. Conversely, if increased competition and pricing pressure cause sales growth to slow to a low-single-digit average annual rate, this could lead to a 5% downside to our F5 price estimate.
BUSINESS SUMMARY
F5 Inc. is a prominent technology company specializing in solutions that enhance the delivery of network-based applications. Their offerings focus on improving the security, performance, and availability of critical network infrastructure, including servers and data storage. Ultimately, F5's products streamline the management of data center operations and the provision of services across a variety of data center resources.
Notably, F5 Inc. was a pioneer in load-balancing technology. This innovative approach evenly distributes internet traffic across multiple servers, effectively presenting them as a unified system.
SOURCES OF VALUE
Application Delivery Network
Solutions for application delivery networks continue to experience rapid growth within the enterprise networking sector. The increasing need for businesses to minimize investment in building and maintaining new data centers while maximizing the efficiency of their current infrastructure has fueled higher demand for application delivery products. Additionally, the growing adoption of cloud-based applications and storage solutions has further propelled the demand for these products.
Services
A substantial portion of F5's revenue consistently comes from its service and maintenance agreements. The company's reputation for providing high-quality service often serves as a key selling point for its product offerings.
KEY TRENDS
Growth in enterprise Internet traffic
Enterprises are increasingly adopting sophisticated video communication technologies. Specifically, web-based video conferencing and network management tools are anticipated to experience a faster rate of adoption compared to traditional business video conferencing solutions.
Shift to cloud-based services and storage
F5 faces competition not only from new companies entering the Application Delivery Controller (ADC) market, but also from service providers that offer native cloud-based solutions. Historically, ADC vendors have concentrated on assisting customers with managing applications within their own data centers. However, with a growing number of applications now being deployed in cloud data centers, ADC vendors are increasingly prioritizing the evolution of their support for cloud-based applications. As a result, established load-balancing companies like F5 Inc. are now competing with the offerings of cloud providers such as Amazon. We anticipate that cloud-based load balancers will capture a larger portion of the application delivery controller market in the future, which could potentially impact F5's revenue growth.
Security solutions are a key growth driver
Given the increasing complexity of networks, minimizing security risks has become a critical priority for enterprises. Over the years, techniques for data theft have become more advanced, and the global market for cybercrime is currently estimated to be over $100 billion.
