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F5 Still No Bargain


Stock-specific valuations mean little in present market.

Despite the look of the chart, F5 Network (FFIV) has been one of the more resilient tech names out there. And since it reported its fourth quarter results on October 22nd, the stock has actually been up in absolute terms.

But after combing through the numbers, the quarter wasn't nearly as good as it may have seemed.
  • All foreign geographies (except Japan) were down quarter-over-quarter.

  • Japan was up $2.1 million quarter-over-quarter, but still down 27% year-over-year.

  • US sales were down (excluding those to the federal government).

  • Sales of the $210 million Acopia acquisition are shrinking, though management is saying that it will indeed become as big an opportunity as BIG-IP... In 10 years. Even without doing the math, it's fair to conclude that Acopia won't end up being a great ROI move for F5.

  • R&D spending has flattened out, and SG&A expenses are being managed exceedingly well, which is a good thing - so long as it doesn't become the reason for profit growth.

  • F5 has walked away from the expansion space, and has reined in hiring; again, kudos to management for being proactive. But it's tough to reconcile those moves with prospects for continued, meaningful growth.

I'm not trying to knock F5 as a bad company -- I'm still meaningfully long (and hedged on) the stock -- and I believe they have technology which will become increasingly critical as data traffic grows and demands on the servers distributing such data continue to rise.

And looking at F5's valuation in a vacuum, the stock isn't expensive. Excluding the $5.5 billion in cash on its balance sheet, it trades at about 15 times GAAP (i.e. generally accepted accouunting principles) 2009 estimates, and just over 8 times FCF (i.e. free cash flow).

Even within its comparables -- Akamai (AKAM) being the closest, despite not being a competitor -- the 2 match up almost identically.

But the problems highlighted for F5 are a symptom of a much bigger issue: How can we form growth assumptions for specific companies while dancing on the edge of a full-blown, worldwide, economic meltdown? (By the way, this link, which I received from Prof. Markman, is a must-read).
In that context, stock-specific valuations don't mean much. What will dictate stock prices centers around what will be the trough multiple for the broad market; and what will be a sustainable P/E ratio for the market coming out of the slump.

Generously using the '73-'74 bear as a reference point, trough P/E's might have to sink into the single digits, and recovery P/E's may only climb back to the 15 range. In that light, F5 and a slew of other stocks are still a long way away from being bargains.
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Positions in FFIV, AKAM
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