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Bandwidth Tech Delivers Solid Value

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As demand for high-speed applications increases, so do profits.

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F5 Networks (FFIV) guided essentially inline, but overcame the dire concerns baked in since its last report.

From Briefing.com: "F5 Networks : Better results and solid outlook driven by data center upgrades":

Robert Baird says FFIV's FQ2 results were surprisingly ahead of expectations with U.S. Enterprise up QoQ, though three verticals were down QoQ. Guidance calls for slight sequential growth and mgmt is assuming U.S. economy remains challenging. Firm increases their ests and recommend purchasing stock at current levels due to solid execution and build-out of next-gen data centers by dot-com companies, which will require higher-end products for scalability. Firm raises their F'08E rev/EPS to $639 mln/$1.36 from $614 mln/$1.22 and F'09E to $711 mln/$1.55 from $694 mln/$1.40.

First, regarding FFIV, Prof. Zucchi and I have commented that we see solid value in these shares and the current quarter simply confirms my view. The next couple quarters will likely not produce huge upside, but FFIV's product cycle is moving into favor and with the stock between $20-24 the expectations and valuation are low enough to more than reflect these moderately muted results from FFIV. PSR P/CF and P/B ratios are near cycle lows for FFIV and if the company produces any meaningful upside in a couple quarters and beyond the stock should make a material move higher. Moreover, even analyst price targets, which average to $29, are quite pessimistic. My fair value estimate is closer to $40 than $30 currently and I'm discounting very little EPS growth for 2008.

Regarding the Baird note, they talk about current Q2 results being "surprisingly" ahead, and this is true. For some reason (likely credit panic and incessant recession talk), the market has baked in very negative expectations for FFIV and many technology stocks this quarter. While I can see that these concerns are valid for companies tied closely to certain areas (the financial enterprise spending and low to mid market consumer), in the bandwidth delivery food chain the end markets haven't materially weakened. In fact, I suspect if we weren't seeing these massive credit issues the growth in bandwidth investment would currently be staggering. As is it, the bandwidth investment is staying strong but rational.

AT&T (T) has weighed in recently with its view of longer term bandwidth constraints, as I've noted on the Buzz. I feel the editorial staff at the 'Ville did a very good job highlighting the Google (GOOG) bandwidth growth tied to YouTube and video search.

I'd also add that many of the companies that are proliferating and supporting bandwidth intensive applications are hitting current number and guiding quite strongly. Note the strength of LSI (LSI), PMC-Sierra (PMCS), Altera (ALTR), Cavium (CAVM), Broadcom (BRCM) (wireline strong), little mentioned Mellanox (MLNX) (Infiniband and interconnect products mainly for data centers) and Equinix (EQIX), as well as FFIV.
Position in FFIV, GOOG, CAVM and BRCM.

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