F5 Networks Lacks Fundamental Catalysts; 2 Firms Downgrade The Stock

The company reported in line June quarter earnings and a revenue miss, pressured by weakness in Europe and Japan. The company also issued soft guidance for the September quarter.

Missing Out On Fundamental Catalysts

Oppenheimer analysts Ittai Kidron, Michael Leonard and George Iwanyc attributed their downgrade to F5 Networks' lackluster June quarter results and September quarter guidance. The analysts see the result as suggesting that the company's iSeries BIG-IP product cycle isn't driving the expected acceleration in year-over-year growth.

Additionally, the analysts noted that the company's standalone security solutions are yet to become significant enough to be termed as growth drivers on their own.

"Coupling this with persistent macro (EMEA), challenges leave us in search of fundamental catalysts to drive F5's shares higher through earnings upside or multiple expansion," Oppenheimer said.

That said, the firm sees the downside being limited by aggressive share repurchases, potential dividends, and Operating expenditure controls/ management.

The firm revised its estimates, to reflect the second quarter results and the guidance.

Trio Of Concerns: Product Growth, Leverage, Lack Of Catalysts

Wells Fargo analyst Jess Lubert attributed his downgrade to his view that product growth is unlikely to accelerate anytime soon, expecting it to decline over the next three quarters. While stating that F5 Network's stock performance is highly correlated to the trend in its product growth, the analyst said stock performance wouldn't improve if product growth fails to kick off.

Additionally, Lubert believes the company might leverage its balance sheet to fund M&A, adding risk to the model.

Thirdly, the analyst sees a lack of catalysts required to reaccelerate growth or rerate the company's shares.

"if F5's customers increasingly shift assets to the public cloud or purchase SaaS rather than on premise software offerings, we think there is likely less of a need for F5's application delivery services, which may impact company growth over the next few years," Wells Fargo said.

As such, Oppenheimer downgraded shares of F5 Networks from Outperform to Perform and removed its $145 price target. Meanwhile, Wells Fargo downgraded the shares from Outperform to Market Perform and lowered its price target from $145 to $120.

At the time of writing, shares of F5 Networks were down 9.16 percent at $116.46.