Why Is F5 (FFIV) Up 5.8% Since Last Earnings Report?

It has been about a month since the last earnings report for F5 Networks (FFIV). Shares have added about 5.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is F5 due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

F5 reported second-quarter fiscal 2023 results, wherein the top and the bottom lines surpassed the Zacks Consensus Estimate.

This Seattle-based company’s non-GAAP earnings of $2.53 per share beat the Zacks Consensus Estimate of $2.42. The bottom line increased 18.8% from the year-ago quarter’s $2.13 per share and was way higher than management’s guided range of $2.36-$2.48 per share.

During the reported quarter, F5 Networks witnessed a 11% increase in its revenues amid a global chip shortage scenario in the semiconductor industry. The company’s non-GAAP revenues were $703.2 million, which beat the Zacks Consensus Estimate of $700.7 million. The top line was above the mid-point of the guided range of $690-$710 million.

Product revenues (48.4% of total revenues), which comprise Software and Systems sub-divisions, increased 14% year over year to $340.6 million. System sales jumped 43% year over year to $209 million, accounting for approximately 61.3% of the total Product revenues. However, Software revenues slumped 13% to $132 million, making up the remaining 38.7% of the total Product revenues.

Global Service revenues (51.6% of total revenues) grew 8% to $362.6 million.

F5 Networks registered sales growth across the Americas, EMEA and APAC regions, witnessing a year-over-year increase of 7%, 22% and 9%, respectively. Revenue contributions from the Americas, EMEA and APAC regions were 54%, 27% and 18%, respectively.

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Customer-wise, Enterprises, Service providers and Government represented 67%, 13% and 20% of product bookings, respectively.

GAAP and non-GAAP gross margins contracted 220 basis points (bps) and 250 bps to 77.9% and 80.4%, respectively.

GAAP and non-GAAP operating expenses went up 1.9% and 4.6%, respectively, to $441.5 million and $374.1 million. F5 Networks’ GAAP and non-GAAP operating margins expanded 330 bps and 70 bps to 15.1% and 27.2%, respectively.

F5 Networks exited the March-ended quarter with cash and short-term investments of $755.3 million compared with the previous quarter’s $660 million.

During the fiscal second quarter, the company generated $141 million of operating cash flow compared with the $158 million reported in the previous quarter. The operating cash flow remained under pressure due to strong multi-year subscription sales, which impacted the cash collection process.

F5 Networks projects non-GAAP revenues in the $690-$710 million (mid-point of $700 million) and non-GAAP earnings per share in the $2.78-$2.90 band (mid-point of $2.84) for third-quarter fiscal 2023. Non-GAAP gross margin is forecast to be around 82%.

For fiscal 2023, F5 Networks expects low-to-mid-single digit revenue growth.The company anticipates non-GAAP earnings to grow in 7-11% band. Non

GAAP operating margin is forecasted to be roughly 30%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, F5 has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, F5 has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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Will F5 (FFIV) Stock Recover To Its Pre-Inflation Shock Level Of $250?

BRAZIL - 2020/02/15: In this photo illustration the F5 Networks website seen displayed on a ... [+] smartphone. (Photo Illustration by Rafael Henrique/SOPA Images/LightRocket via Getty Images)

F5 stock (NASDAQ NDAQ : FFIV) currently trades at $146 per share, around 9% above its level in November 2022, and it seems like it has little room for gains. F5 FFIV saw its stock trading at around $153 in June 2022, just before the Fed started increasing rates, and is now 4% below that level. The stock has gained a mere 1% since its low in September 2022 compared to the S&P 500, which gained about 18% during this period. The underperformance of FFIV stock over recent months can be attributed to its downbeat guidance. Although the rally in broader markets has been driven by a steady decline in the inflation rate in response to the Fed’s aggressive rate hike plan, investors still have concerns about a potential recession. The steady increase in F5’s revenues over recent quarters has failed to spark any rally in the stock thus far.

Returning to the pre-inflation shock level means that FFIV stock will have to gain around 70% from here. However, we do not believe that will materialize any time soon, and we estimate F5’s valuation to be about $153 per share, implying just 4% gains. This is because the recent uncertainty in the financial sector has made investors concerned about a potential recession. The company’s management has cut its revenue and earnings guidance for fiscal 2023, citing macroeconomic factors and their potential impact on consumer spending.

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

2022 Inflation Shock

Timeline of Inflation Shock So Far:

FFIV Performance During 2022 Inflation Shock

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

Timeline of 2007-08 Crisis

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

FFIV revenues rose from $2.2 billion in 2019 to $2.7 billion in 2022, led by services and products revenues growth due to increasing demand for the company’s services and entry into new markets. Despite higher revenue, reported earnings decreased from $7.12 in 2019 to $5.34 in 2022 due to a decline in operating margins, which fell from 23.1% to 15.0% over this period due to higher expenses, including a rise in component costs. Our F5 Operating Income Comparison dashboard has more details.

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

F5’s total debt rose from nil to $350 million in 2022, but as of the latest quarter, the company has cleared its debt. Its total cash decreased from around $1 billion to $0.7 billion over the same period, and it generated $510 million in cash flows from operations in the last twelve months. The company has no debt burden 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 sentiment, we believe F5 stock has the potential for good gains once fears of a potential recession are allayed. That said, a possible decline in consumer spending and a steady fall in the company’s operating margins means it may take a while for F5 stock to reach its pre-inflation shock highs of over $248.

While FFIV stock looks like it has little room for growth, 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.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for F5 vs. Target TGT .

With inflation rising and the Fed raising interest rates, among other factors, F5 stock has risen just 2% this year, underperforming the broader indices, with the S&P500 index up 11%. Can it drop from here? See how low F5 stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

FFIV Return Compared With Trefis Multi-Strategy Portfolio

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