F5 Networks Customers Are Migrating To The Public Cloud, Analyst Says In Downgrade

The emergence of cloud computing is posing a risk to F5 Networks, Inc. FFIV, as its core market suffers due to public cloud migrations, according to Morgan Stanley. 

The Analyst

Analyst James Faucette downgraded F5 Networks from Equal-weight to Underweight with a price target maintained at $130.

The Thesis

The strong year-to-date run-up in F5 Networks reflects investor confidence in the overall IT spending environment and the company's return to product revenue growth, Faucette said in a Thursday note. (See the analyst's track record here.) 

While the consensus estimates model 3-percent revenue CAGR through fiscal 2020, the analyst said his reseller survey reveals a likely deceleration in sales over the next 12 months; a decline in sales the following year; and negative headwinds from customer migrations to the public cloud. 

The shift is made possible by the availability of competitive alternatives and declining demand for F5's on-premise application delivery controllers, Faucette said. With a protracted decline in physical appliances revenue, which comprises 73 percent of the product revenue, the analyst forecast limited stock drivers.

Citing channel checks, Faucette said he forecast an in-line June quarter. Yet the analyst said he expects the negative data points to play out by the end of the current calendar year.

Morgan Stanley lowered its estimates for 2019 and beyond to factor the negative trends from its surveys and longer-term concerns into its model for F5. 

"As results begin to disappoint current estimates we expect the stock to underperform our coverage universe." 

The Price Action

F5 Networks shares have soared about 37 percent year-to-date. The stock was down 4.32 percent at the time of publication Thursday. 

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Photo courtesy of F5 Networks.