Force Five Networks

During the last several years, F5 has doubled its share of the application switch market–largely at Cisco’s expense–by pushing its software-based approach to traffic management. I have been owning Force five since it moved above 100$ and have been adding as the stock moves in the right direction. I recently added some more shares after it broke above 130. I plan on liquidating more than 50% of shares once it reaches145$.

What does Force Five Network do?

During the last five years, F5 Networks’ differentiated approach to network traffic management has allowed it to steadily gain share from much larger rival Cisco Systems CSCO in the rapidly growing application delivery controller (ADC) market. We think F5’s technological lead and the proven value of its products to customers positions the company for ongoing success for years to come, despite increasing competition over time.

As enterprises and telecommunications carriers continue moving voice, data, and video toward a converged IP network, effectively and securely managing network traffic has become an increasingly complex task. ADCs have proved to be very helpful in allowing users to simplify this task while improving overall network efficiency and reducing expenditures on other equipment. ADCs sit in front of a firm’s servers and manage traffic from the outside world. They ensure efficient and secure movement of data by discerning the nature of the traffic (where traffic is coming from, what type of information it contains, and where it is going), and then either block, redirect, or expedite delivery of each data stream to the proper server.

As its ADCs consist of multiple applications running on a highly specialized operating system that in turn runs on custom-built commodity hardware, F5 has industry-leading gross margins of around 80%. This approach positions F5 for future growth and sustained margins, because as the firm integrates more functionality into its switches, its customers become more reliant on its devices, making changing vendors more burdensome. Moreover, F5’s proprietary operating system, TMOS, is highly customizable, allowing customers to find new uses (some of which were unforeseen by F5) for the software, thus increasing their investment in F5’s platform.

Let’s delve into income sheet of FFIV. The table looks excellent but with only one flaw – decelarating earning and sales increase. This is not a concern if you enter the stock at right time.

Year EPS High ($) Low ($)
2007 1.41 46 25
2008 1.45 35 17
2009 1.68 53 18
2010 2.51 143 47
2011 3.78 145 69
2012 4.48
2013 5.3
Last 4   Quarters EPS % Change Sales (million) %Change Fund Owners
Q4 0.88 57% 277 35% 1035
Q3 0.97 47% 290 26% 1068
Q2 1.06 34% 314 24% 1077
Q1 1.03 17% 322 20% 1164
P/E 34
P/E 5 Year Range Dec-50
Earning Growth 30%
ROE 29%
Cash Flow/Share 4.16
R&D Expense of sales 12%
Debt 0%
Beta 2

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