What’s Happening With F5 Stock?

F5 stock (NASDAQ: FFIV) currently trades around $200 per share, roughly 20% below its pre-inflation shock highs of around $250 seen in December 2021. F5 has fared slightly better than its peer – VeriSign stock (NASDAQ:VRSN) – down nearly 30% over this period. F5 has seen its services sales rise lately, while its systems sales have been trending lower, weighing on the company’s overall performance.

F5 saw its stock trading at around $153 in June 2022, just before the Fed started increasing rates, and has recovered 30% from that level. This compares with 45% gains for the S&P 500 index over this period. Much of the rebound in FFIV stock was seen from late July this year, after the company reported an upbeat quarter, with margin expansion and the fourth quarter outlook better than the street estimates.

Notably, the changes in FFIV stock over the recent years have been far from consistent, with annual returns being considerably more volatile than the S&P 500. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could FFIV face a similar situation as it did in 2022 and underperform the S&P over the next 12 months — or will it see a strong jump? Returning to the pre-inflation shock level of $250 implies that FFIV stock will have to gain around 23% from here, and we don’t think it will materialize anytime soon.  We estimate F5’s valuation to be about $195 per share, close to its current market price of $200. At its current levels, FFIV stock is trading at 4.2x revenues, marginally above the 4.1x average P/S ratio seen over the last five years.

Our detailed analysis of F5’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen since 2022. It compares these trends to the stock’s performance during the 2008 recession.

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P 500 recoup some of its losses.
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession but points to potential rate cuts in 2024

In contrast, here’s how FFIV stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

FFIV and S&P 500 Performance During 2007-08 Crisis

FFIV stock declined from $38 in September 2007 (pre-crisis peak) to around $20 in March 2009 (as the markets bottomed out), implying FFIV stock lost over 45% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $53 in early 2010, rising 165% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

FFIV Fundamentals Over Recent Years

F5’s revenue has risen at a 6.2% average annual growth rate from $2.4 billion in fiscal 2020 (fiscal ends in September) to $2.8 billion in 2023, led by services and product revenue growth due to increasing demand and entry into new markets. F5’s operating margin also expanded from 17% in 2020 to 19% in 2023. Higher revenues and margin expansion resulted in the company’s reported earnings rising from $5.01 to $6.55 over this period.

Does F5 Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

F5’s total debt declined from $773 million in 2020 to $261 million now, while its total cash decreased from around $1.2 billion to $0.9 billion over the same period. The company generated $736 million in cash flows from operations in the last twelve months. The company has a low debt and a good cash balance, so it appears to be in a comfortable financial position.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe F5 (FFIV) stock has the potential for some gains once fears of a potential recession are allayed. That said, an uncertain macroeconomic environment, weak consumer sentiment, and falling systems sales remain the key risk factors to realizing these gains. We think investors willing to pick FFIV will be better off waiting for a dip.

While FFIV stock looks like it is fully priced, it is helpful to see how F5’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 9/11/2024
[2] Cumulative total returns since the end of 2016

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