A Pick-and-Shovel Tech Stock

09/14/2012 11:15 am EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

They say it wasn't the gold miners that made it big in the Gold Rush, it was folks selling the picks and shovels. With all the wireless data streaming these days, don't buy the device makers, but the people that make the networks work, writes Ian Wyatt of Top Stock Insights.

While chips, parts, and screens are the obvious ways to benefit from new Apple (AAPL) products, investors seem to forget that each time an Apple device is powered up, it's sending data over a wireless network.

The amount of data transferred wirelessly has doubled every year for the past five years. Our favorite play on this trend, F5 Networks (FFIV), can make networks run more efficiently.

With the evolution of phones and tablets, industry experts expect the amount of wireless data to maintain a similar rate of growth. That's because phones are constantly adding new features that gobble up more and more bandwidth (for example, watching TV will be a big drain).

These new mobile devices are putting an immense strain on the wireless network. While the average smartphone generates only 35 times the amount of traffic as a traditional cell phone, other devices are not so gentle.

Currently at 4 billion, the number of connected devices is quickly nearing the world's population. By 2015, it will hit 16 billion—double the world's population. Imagine the amount of data that will be sent when 16 billion smart devices come online.

IT engineers are working hard to expand the wireless network, creating the bandwidth necessary for the future demand. However, they will need help. As engineers figure out ways to make the network bigger, F5 Networks is making it run faster. With F5, you are investing in a company in line to profit from the iPhone and iPad revolution, but not on the hardware side.

Also, the shares of FFIV are cheap, trading at 18 times forward EPS of $5.17. F5 has beaten analyst EPS estimates for the past four quarters too, setting shareholders up for another beat this quarter.

That may not seem cheap to some investors. However, consider that the average P/E for the industry is 24.4. For comparison, competitors Citrix (CTXS) and Juniper Networks (JNPR) have P/E ratios above 35.

Apple is king of technology stocks. However, FFIV is poised to provide shareholders with a king's ransom over the next several years.

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