F5 Remains Focused on Software and Security Growth; $210 Fair Value Estimate

Business Strategy & Outlook

F5, a leader in application delivery controllers, or ADCs, market sells to enterprises, service providers, and government entities. More than half of F5’s revenue comes from selling support and maintenance services for its products. Mission-critical ADCs manage the uptime, delivery, and security of applications and network traffic flow. Growth in public cloud-based workloads caused a decline in the on-premises ADC hardware required and shifted ADC demand to software-based solutions. F5 was slow to embrace cloud-based workloads as it perilously defended its incumbent offerings, but a revamped management team properly pivoted F5’s focus toward software and cloud-based products as growth catalysts to supplement its legacy hardware dominance, and the firm is set to thrive.

With 90% of its development team dedicated to software, F5’s roadmap is focused on virtual instances of ADCs, stand-alone application security products, and products and services for multi-cloud application control. IT teams may rely on the large public cloud vendors for traffic management within their respective clouds, but F5 helps control the traffic between on-premises, private, and public clouds and has enterprise rich features. As one of the leaders in the ADC market, F5 will likely remain the go-to provider of solutions for their customers’ cloud ecosystems due to product familiarity, customization features, application and network level management, security-focus, and an active developer community. The criticality of applications for organizations and the importance of a positive application experience for consumers are boons for F5. The complexity of managing application traffic will increase as disparate devices spread beyond the data center while requiring lower latency, larger data workloads, and protection from a growing quantity of security threat vectors. F5’s consolidated approach for application and networking traffic flow across the entire network will remain in strong demand as businesses expand their creation and consumption of applications and data.

Financial Strengths

F5 is a financially sound firm. The company has solidly generated strong free cash flow, possesses a war chest of cash, and has no debt on its books. At the end of fiscal 2021, F5 possessed $911 million in cash and cash equivalents versus $369 million in debt. F5 could pursue possible acquisitions, potentially targeting software and cloud-based application delivery, management, and analytics technologies. F5 has a solid track record of repurchasing shares and expects to return half of its free cash flow to investors via share buybacks starting in fiscal 2023. The company has never paid a dividend, and F5 is not expected to pay one in the current forecast. With its strong balance sheet and free cash generation, F5 is expected to continue bolting on acquisitions in areas that support application delivery and security.

Bulls Say

F5’s leading install base could make it the first choice for customers pursuing the high growth areas of software and cloud-based solutions for application and traffic management.

A strong brand coupled a very sticky services businesses may ward off potential open source or lower cost software-based threats. F5 has key technology alliances with networking and data center providers.

Data proliferation and complexities through 5G and Internet of Things offers strong growth possibilities as customers may require a seasoned application delivery vendor.

Company Description

F5 is a market leader in the application delivery controller market. The company sells products for networking traffic, security, and policy management. Its products ensure applications are safely routed in efficient manners within on-premises data centers and across cloud environments. More than half of its revenue is based on providing services, and its three customer verticals are enterprises, service providers, and government entities. The Seattle-based firm was incorporated in 1996 and generates sales globally.

(Source: Morningstar)

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