F5 Double-Downgraded By Blair And JMP: Here's Why

• F5 Networks, Inc. FFIV shares have been volatile so far in 2015, and are down 18 percent year-to-date.
• William Blair’s Jason Ader and JMP Securities’ Erik Suppiger downgraded the rating for the company to Market Perform.
• Following an unimpressive Analyst Day held by the company on Nov 12, there appears to be limited catalysts for the stock, the analysts said.

Stuck Between Growth And Value

William Blair’s Jason Ader downgraded the rating on F5 from Outperform to Market Perform. Given the downturn in shares, further downside seems limited.

Ader added, however, that F5 has a history of protecting earnings and cash flow, due to which it is difficult to “identify a catalyst for several quarters.”

He said that the company appears to be “stuck in a catch‐22 situation,” since it would need to invest in growth more aggressively in order to return to sustainable growth, while such investments would shake up its operating model, which could exert pressure on the stock. Thus, there is limited upside to shares.
In the report William Blair noted, “…the stock is stuck in a purgatorial state between growth and value, and we believe management is overly optimistic about the business’s true growth prospects amid the status quo - a phenomenon that we believe is contributing to the recent spate of executive departures.”

Refresh Cycle May Not Be Enough

JMP Securities’ Erik Suppiger downgraded F5 from Market Outperform to Market Perform, citing limited catalysts for the company’s stock, “with the exception of an upgrade cycle that will be onetime in nature.”

Suppiger said that a hardware refresh cycle could offer some incremental revenue growth. He added, however, that investors may discount such revenue growth in view of it being cyclical and hardware-centric.

Moreover, the refresh cycle would not be a meaningful catalyst until FY17, with new hardware appliances being released in F2H16, and product refreshes expected to take a minimum of six months to gain significant traction, the analyst mentioned.

In the report JMP Securities noted, “In addition, we are concerned the migration to public cloud providers, such as Amazon AWS and Microsoft Azure, is serving as a net headwind to F5, as enterprises migrate more workloads to these providers, potentially reducing the total market opportunity for F5.”

There seems to be little upside in FY16, apart from some refresh-associated revenue in F2H16. F5's shares are trading in-line with peers, and appear fairly valued, Suppiger commented.