3 Reasons Deutsche Bank Downgraded F5 Networks To Sell

Analysts at Deutsche Bank downgraded F5 Networks, Inc. FFIV Wednesday to Sell from Hold with a price target slashed to $100 from $120.

Deutsche Bank's Vijay Bhagavath stated in his report the downgrade is a fundamental call heading into fiscal 2018 and not in reaction to its upcoming earnings report in late April. Heading into the new fiscal year, the analyst expects secular headwinds for its Product and Services revenues which serves as a "key detractor to stock performance."

Secular Headwinds

Bhagavath highlighted three factors that supports his views of a deceleration in the segment, including:

• Competitive pressures from other cloud providers including AWS and Azure.
• F5 selling mostly into "North South" instead of "East West" load centers which is seeing exponential growth and growing share of wallet for upstarts.
• F5's Cloud Security opportunity will also face heightened competition.

With that said, Bhagavath is calling for a "modest" 3 percent compounded annual growth in F5's Product Revenues segment from fiscal 2018 through fiscal 2020. Also important to note is the fact that more than 60 percent of the company's free cash flow is generated from "Maintenance Services."

"Our core insight is that the FFIV bulls are "paying up" for an Earnings and Free Cash Flow stream that is currently generated mainly from "lower quality" Maintenance Services versus from Product Revenue growth - which is a fundamental determinant of the trading multiple," the analyst concluded.

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