F5 Networks: High-quality tech on sale

This data-solutions company is riding the wave of cloud computing and the popularity of smartphones.

By TheStockAdvisors Jul 18, 2012 10:01AM
By Geoffrey Seiler, BullMarket.com

Long-time investors know that the behavior of Mr. Market can lead to head scratching. For long spells he can be the epitome of sobriety, seeing value for what it is and acting to bid up the prices of good companies. At other times, he's the town drunk, blindly selling a quality name out of fear.

A case in point is what's happened to shares of the F5 Networks (FFIV) since they traded near their one-year high in early May and then fell more than 30%.

F5 is a Seattle-based technology company whose Application Delivery Networking (ADN) technology is used to manage data traffic between users and application servers in data centers.

As more of the data people and companies rely on moves to the cloud, F5's technology increasingly occupies what management says is a sweet spot in the data center.

Given its established presence in data centers around the world and the increasingly large amounts of data flowing over the Internet and private networks, how do you explain the stock's -32% plunge from the $136 level in early May to its $91.76 close Tuesday night?   

F5 does have exposure to the federal government sector, but Washington's problems didn't just appear out of thin air; they've been known for some time.

While investors have turned skittish towards large-cap tech stocks, the sell-off in F5's shares intrigues us. This is a company that continues to ride some strong secular tailwinds, such as the explosive growth of cloud computing, the build-out of virtual desktop infrastructure, and the growing use of smartphones.

We honestly don't see those trends abating any time soon, or companies completely backing away from needed investments related to those strong currents though some slowdown in spending is possible, we suppose.

F5 reports next week and we would expect it to deliver another solid quarter, but all eyes will be on guidance.

The company's performance has been exceptional and the 20% growth target seems attainable. Given the sell-off we think the stock is looking attractive.

Strip out its $13.08 per share in cash and investments, including ones categorized as long term (it has no debt), and the valuation has dropped to less that 14.5 times the 2013 consensus earnings per share estimate of $5.39.

There could be a near-term slowdown and the F5 could certainly disappoint when it reports earnings next week, but this is a high-quality tech name on sale, and it's one we're happy to dip a toe into and then buy more if it experiences any post-earnings weakness.

As such, we're going to add F5 to the Recommended List with a "buy" rating and a $120 price target.

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