ADSP And iRule Tools Will Integrate Load Balancing And Security

Key Takeaways

• Introduction of ADSP and AI-driven innovations are expected to drive revenue growth and improve net margins.
  
• Planned share repurchases using free cash flow may enhance EPS and improve stock valuation.
  
• Heavy reliance on software renewals, U.S. federal spending, and AI opportunities could threaten future revenue growth amid economic and competitive pressures.

Catalysts

Provides multicloud application security and delivery solutions in the United States, Europe, the Middle East, Africa, and the Asia Pacific region.

• F5's introduction of the Application Delivery and Security Platform (ADSP) is expected to drive future growth by consolidating high-performance load balancing and advanced security capabilities, which should positively impact both revenue and net margins.
  
• The company's focus on AI-driven innovations, such as the iRule code generator and expanded AI assistant functionality, could enhance customer productivity and lead to higher software revenue growth.
  
• The upcoming renewal cycle and increased software subscription base are set to drive software revenue in the latter half of the year, potentially boosting overall earnings and EPS.
  
• F5's hardware refresh cycle, driven by end-of-life replacements of existing products like VIPRION and iSeries, is expected to sustain systems revenue growth and support long-term revenue stability.
  
• The company plans to use a significant portion of its free cash flow for share repurchases, which could enhance EPS and provide a catalyst for stock valuation improvements.

F5 Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming F5's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.1% today to 24.8% in 3 years time.
• Analysts expect earnings to reach $862.0 million (and earnings per share of $14.74) by about April 2028, up from $621.4 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $639.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.6x on those 2028 earnings, down from 24.5x today. This future PE is greater than the current PE for the US Communications industry at 20.3x.
• Analysts expect the number of shares outstanding to decline by 1.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.95%, as per the Simply Wall St company report.

F5 Future Earnings Per Share Growth

Risks

• The flat growth in software revenue might indicate a heavy reliance on renewals without significant expansion in new sales, which could affect future revenue growth.
  
• Hardware demand could be temporarily boosted by ongoing tech refresh cycles and potential pre-buy ahead of tariff implementations, introducing a risk of future revenue slowdowns once these cycles are over.
  
• The high dependency on U.S. federal government spending, which could be impacted by economic or political disruptions, might affect revenue stability and growth.
  
• F5's optimism for AI-related opportunities is noted, but AI revenue contributions are still nascent and face competitive pressures, posing a risk to anticipated revenue streams.
  
• The complex landscape of global economic conditions and foreign exchange rates presents potential risks to EMEA and APAC revenue, impacting overall net margins.

Valuation

• The analysts have a consensus price target of $289.691 for F5 based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $320.0, and the most bearish reporting a price target of just $260.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.5 billion, earnings will come to $862.0 million, and it would be trading on a PE ratio of 22.6x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $262.72, the analyst price target of $289.69 is 9.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.