Multi-cloud application network and cybersecurity solutions provider F5 (NASDAQ:FFIV) Stock has fallen (-35%) for the year. With F5, organizations and data centers can protect their networks and applications from hackers and bots. The company has largely pursued a growth through acquisition strategy to enter and expand footprints in its operating segments. The company is benefiting from a strong tailwind in cloud and internet security that is also driving growth for its competitors such as Palo Alto Networks (NASDAQ: PANW) and Crowdstrike (NASDAQ: CRWD). The pandemic caused global supply chain disruption, forcing F5 networks to focus on its software operations to clear the backlog in its hardware operations. It bolstered its portfolio with acquisitions of Volterra and Threat Shack in 2021 to double its total addressable market (TAM) in the cloud and application security segment. Supply chain disruptions have forced the company to turn more towards software and away from hardware. This has enabled the software segment to bring in 40% of its total revenue, up from less than 24% before the 2019 pandemic. It has also enabled the company to generate 72% of its revenue from recurring sources. Although the delivery volume has not improved, there has been no further deterioration since June 2022. This could lead to improvements in the second half as suppliers expect to increase additional capacity by the end of 2022.
Legacy hardware plagued by supply chain issues
F5 originally sold application network controllers (ADCs) to data centers, Internet service providers and governments. ADCs enable application management of Internet traffic between network devices and servers. Two catalysts forced the company to move towards growing its software business through a subscription model. First, migration to cloud-based applications has eroded the demand for on-premise ADCs. Second, global supply chain disruption has limited the ability to ship systems despite strong demand. The company saw a 38% growth in software sales, which resulted in a revenue growth of 4%.
On July 25, 2022, F5 released its fiscal third-quarter earnings report for the quarter ended June 2022. with $0.34. Revenues grew 3.5% year-over-year (year-on-year) to $674.49 million, better than analysts’ estimates of $667.81 million. The company announced an additional $1 billion share repurchase program, in addition to its remaining $272 million repurchase program. F5 Networks CEO Francois Locoh-Donou noted, “Customers depend on F5 to secure and deliver exceptional digital experiences that fuel their businesses and fuel their brands. Security demand across all customer vertical segments drove sales in our third quarter, resulting in 4% overall revenue growth despite ongoing semiconductor shortages.”
Raise the roof
F5 raised its forecast for Q4 2023 earnings per share from $2.45 to $2.57 versus analysts’ consensus expectations of $2.28. The company estimates revenues of $680 million to $700 million versus $690.89 million by consensus analysts. Security vulnerabilities continue to drive most of its customer engagement, fueling demand for both software and hardware as customers add and scale applications.
The wins continue
F5 continues to win wins and gain market share. A major global retailer chooses F5 over an existing bone defense provider after a three-month direct proof of concept against its existing solution. The distributed cloudbot solutions proved more efficient and convinced the customer to use F5 to protect their apps and customers. With F5, enterprises can simplify and secure their operations using both traditional and modern architectures. The February launch of its new software-as-a-service (SaaS) platform offering of its distributed cloud services enabling the delivery of security, multi-cloud networking and edge computing solutions is gaining momentum. The company also sees service providers scaling up and securing 4G cores and starting to put 5G cores into production. F5 will grow from the growth drivers of software and the SaaS offering of distributed cloud services.
This is what the charts say
Let’s analyze FFIV on the daily and weekly time frames through the gun charts. The weekly gun chart’s uptrend has a rising 5-period moving average (MA) at $168.82 followed by the 15-period MA support at $160.89. The weekly 200-period support is at $166.40. The weekly stochastic rises towards the 70 band. This would normally be a bullish-looking chart if not for the aggressive pull that caused stocks to collapse in one candle straight through the weekly 5-period, 15-period and 200-period MAs to try to make a bottom in the near $159.93 Fibonacci (fib) level. Bulls will have to protect the market structure layer (MSL) buy trigger for $157.43. The indicators, especially the weekly stochastics, will be updated over time. The daily gun chart is in the downtrend testing the 50-period MA support at $160.34. The daily 5-period MA resistance is down at $164.86 followed by the 15-period MA resistance at $169.16. The daily lower Bollinger Bands (BBs) are testing at $159.87. The daily stochastic has made a full oscillation through the oversold 20 band. Attractive pullback levels lie on the weekly MSL trigger of $157.43, $151.66, $147.54 fib, $142.43, $139.82 fib, $133.04 fib and the fib level of $130.42.