Growth investing can sometimes be a pain in the butt. This is especially true when you find a company that seems expensive, yet the stock will continue to climb as long as that company is posting growth numbers that the Street craves. For quite some time, F5 Networks, Inc. (NASDAQ:FFIV) has fit this description pretty well. But the bar just might have been raised a little too high this time.
While F5 Networks, Inc. (NASDAQ:FFIV) remains a strong play in network traffic management products and services, the company’s no longer on the torrid growth path it once enjoyed. Nevertheless, the stock is holding up pretty well despite the fact that the company is coming off two sub-par earnings reports, including the most recent first quarter when F5 Networks, Inc. (NASDAQ:FFIV) missed on both revenue and earnings-per-share estimates.
Yeah, but so what…
As have been the case for quite some time, there are still plenty of F5 Networks, Inc. (NASDAQ:FFIV) bulls that want to dismiss the company’s recent struggles. On Monday, Deutsche Bank’s Brian Modoff reiterated his buy rating on the stock, while also assigning a price target of $116. Basically, Modoff believes there is 33% upside in these shares. I just don’t see it.
Besides, given that the price-to-earnings ratio is currently trading at more than twice that of Cisco Systems, Inc. (NASDAQ:CSCO), the share price is already too high. What can F5 do, beyond doubling revenue growth to justify a premium of 33%? For that matter, revenue growth has to return to (at least) 20%. And with increased competition from rivals like Cisco Systems, Inc. (NASDAQ:CSCO) and Fortinet Inc (NASDAQ:FTNT), this is no small task, especially since F5 Networks, Inc. (NASDAQ:FFIV) only managed 13% growth in its recent quarter, which was only a 1% sequential improvement.
By contrast, not only did Fortinet Inc (NASDAQ:FTNT) beat on both top and bottom line estimates, but Fortinet Inc (NASDAQ:FTNT) grew revenue and net income at a rate of 25% and 26%, respectively. Bulls will argue that F5 grew service revenue 28%. But F5 managed to offset the strong service performance with a dismal 4% growth in product revenue, which also arrived down 2% sequentially.
So, absent some significant fundamental improvement, it’s tough to see how F5 is going to grow in a manner that supports 33% premium in share price. In his research note, Modoff suggested that some “big banks” had shown “meaningful interest” in F5’s Web application security and DDoS mitigation solutions.”
DDoS, which stands for distributed denial of service, is a form of coordinated computer attack. While F5 is certainly strong in this sort of threat prevention, it is no monopoly. Aside from battling Cisco Systems, Inc. (NASDAQ:CSCO) and Fortinet Inc (NASDAQ:FTNT), there are also new entrants like Palo Alto Networks Inc (NYSE:PANW) and Sourcefire, Inc. (NASDAQ:FIRE) that are generating plenty of excitement. In other words, not only does F5 have growth to worry about, there is now the threat of margin compression.
