Our latest featured stock recommendation has carved out a business model connecting technological territory that didn’t exist a decade ago, explains Richard Moroney, editor of Dow Theory Forecasts.
F5 Networks (FFIV) makes hardware and software to help clients deliver services over the internet, managing user traffic to enhance availability, speed, and security.
As the technology industry shifted to a software-as-a-services business model in recent years, so did F5. In the December quarter, F5 generated 52% of its revenue from services, with 48% from products.
Going forward, expect services to continue increasing revenue share, and expect security to grab a bigger piece of the services pie.
While profit growth has slowed in recent quarters, F5 last posted a decline in the June 2013 quarter, and its sales have risen in 26 consecutive quarters.
Operating cash flow jumped 28% in the last 12 months and 19% annually over the last five.
The company’s 2016 fiscal year ends in September and analysts currently expect to see a 4% increase in sales and a 5% increase in profits. In my view, these estimates seem unduly conservative. Here are just three reasons for our confidence:
- F5 closed out fiscal 2015 with $783 million in deferred revenue, mostly in the form of service maintenance contracts. The company will fulfill those contracts over time, generating a reliable stream of revenue.
- F5 now generates more than one-third of its revenue from high-margin software, a percentage likely to rise going forward. The software-only Virtual Edition product managed 99% sales growth in the last fiscal year.
- In January, F5 touted a rich pipeline of new and refreshed products, pitching the second half of fiscal 2016 (April through September) as “another inflection point in F5’s history as a growth company.”
Overall, F5 has a history of aggressive growth and conservative projections. We rate the stocks as a long-term buy.
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By Richard Moroney, Editor of Dow Theory Forecasts
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