Post-plunge F5 Networks is a buy
Shares of the highflying tech stock plummeted 20% Thursday on a weak sales forecast, providing investors with an attractive entry point, analysts say.
By Robert Holmes, TheStreet
Still, analysts and investors are saying now's the time to buy more shares in the maker of cloud-computing software, including Catharine Trebnick, a senior research analyst with Avian Securities; Credit Suisse's Paul Silverstein; Piper Jaffray's Troy Jensen; and Mark Schultz, the manager of the MTB Mid-Cap Growth Fund.
F5 Networks late Wednesday reported adjusted earnings of 88 cents a share, beating the 83-cent average estimate of analysts polled by Thomson Reuters. Revenue of $268.9 million, however, fell short of the consensus view of $270.6 million. F5 Networks offered revenue guidance for the fiscal second quarter that also came up shy of Wall Street's expectations.
Avian Securities' Trebnick said that F5 Networks should be a core holding and that investors should buy on any pullback in the stock.
"We are bullish on F5 growth prospects with cloud-computing opportunities in telco and enterprise," Trebnick wrote in a research note Thursday. "We realize that the company must demonstrate sustained growth in order to continue to show they can beat estimates going forward, but having said that, we believe the company is on the right track."
Silverstein at Credit Suisse raised his outlook on the stock to "outperform" from "neutral," saying he sees no meaningful change in F5's earnings or revenue outlook. He and Piper Jaffray's Jensen said the selloff provides a compelling valuation for F5 Networks shares.
TheStreet Ratings has a "buy" rating on F5 Networks, with a price target of $188.93 as of Jan. 16, before the release of the company's latest financial results. The "buy" rating was "based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate." Among other analysts following F5, 17 say investors should buy shares, 15 have a "hold" rating on the stock, and two recommend that investors dump shares, according to Bloomberg.
Some investors already are acquiring shares. F5 opened at $111.68 and was up 3.4% in recent trading. The stock hit an all-time high of $145.76 on Jan. 13 before falling as low as $106.10 yesterday.
Despite the drop, believers in F5 Networks' growth story have seen their investment more than double over the past year. F5 Networks was among the best-performingS&P 500 ($INX) stocks in 2010. The success has come on the back of F5's Application Delivery Controller (ADC) products, which help companies manage their computer network traffic more efficiently.
As in any technology growth story, F5 Networks faced fierce criticism that it rallied too much and that Wall Street's expectations for the company's quarterly numbers were overblown. Indeed, other high-flying technology stocks like Riverbed Technology (RVBD) and Acme Packet (APKT) also sold off Thursday but are rebounding in Friday's trading session, up 4.2% and 7.4%, respectively.
The decline in F5 Networks even took a toll on its larger rival Cisco Systems (CSCO), which fell as much as 2.5% Thursday day. Other network-equipment makers, such as Blue Coat Systems (BCSI) and Cavium Networks (CAVM), fell sharply and haven't recovered.
The massive historical returns of F5 Networks has made the stock a popular pick for mutual funds and hedge funds, including Philippe Laffont's Coatue Management, which focuses on technology stocks. The fund was founded in 1999 after Laffont left Tiger Management, the hedge fund run by billionaire Julian Robertson. F5 Networks is the third-largest holding for Coatue Management, according to a quarterly report filed with the Securities and Exchange Commission in November. F5 represented about 10% of Coatue Management's portfolio as of Sept. 30, worth roughly $330 million.
Even with Friday's modest rebound, holders of F5 Networks are licking their wounds. And not every analyst is willing to step into the sell-off. Canaccord Genuity technology analyst Paul Mansky, who has a "neutral" rating on the stock, noted that "demand was cited as being inexplicably week in late October, which wasn't subsequently recovered."
Bank of America/Merrill Lynch research analyst Tal Liani takes a harder stance in noting the fate of highflying companies like F5 Networks: Valuation doesn't matter, until it matters.
"We are worried with some hype around the 'cloud' concept, which has translated into high estimates and rich valuation across tech," Liani wrote in a research note yesterday. "Therefore, despite the attractiveness in recent share weakness, we would wait until Street estimates decline to achievable levels."
Liani leaves investors with one final note of caution relating to F5 Networks' value. "The shares are still not cheap at 23 times our reduced 2012 estimate."
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