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F5 Inc. stock (NASDAQ: FFIV), a network hardware, software, and services provider, recently reported its Q1 fiscal 2024 results (fiscal ends in September), with top and bottom beating the street estimates. The company reported revenue of $693 million and an adjusted profit of $3.43 per share, compared to the consensus estimates of $687 million in sales and earnings per share of $3.04. While FFIV stock has risen 6% in a month, we think it’s appropriately priced now, and investors willing to enter will likely be well off waiting for a dip for better long-term gains. In this note, we discuss F5’s stock performance, key takeaways from its recent results, and valuation.

FFIV stock has seen little change, moving slightly from levels of $175 in early January 2021 to around $185 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period. Overall, the performance of FFIV stock with respect to the index has been lackluster. Returns for the stock were 39% in 2021, -41% in 2022, and 25% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that FFIV underperformed the S&P in 2022.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks, for heavyweights in the Information Technology sector, including MSFT, AAPL, and NVDA, and even for the mega-cap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could FFIV face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, we think FFIV is fully priced. We estimate F5’s Valuation to be $176 per share, roughly 5% below its current levels of $185. Our forecast is based on a little under 14x P/E multiple for FFIV and expected earnings of $12.65 on a per-share and adjusted basis for the full year 2024. The 14x P/E multiple aligns with the average value over the last two years.

F5’s revenue of $693 million was down 1.1% y-o-y as a 7% growth in services revenue was more than offset by a 10% fall in product sales. While the renewal of maintenance contracts aided services sales, lower systems sales weighed on overall product business. However, its adjusted operating margin of 35.5% in Q1’24 fared better than 26.5% in the prior-year quarter. This resulted in the bottom line expanding to $3.43 on an adjusted basis versus $2.47 in Q1’23.

Looking forward, the company expects its Q2 sales to be in the range of $675 million to $695 million and adjusted earnings to be in the range of $2.79 to $2.91 per share. This compares with a top line of $703 million and bottom line of $2.53 in Q2 of fiscal 2023. The Q2 forecast fares better than the street estimates and has aided the stock price growth over the last week or so.

Although better than expected guidance and improvement in margins fare better for F5, we think the positives are already priced in with its stock trading at 14x forward earnings. Even if we were to look at the P/S multiple, FFIV trades at 3.8x sales, close to its last five-year average of 4.0x.

While FFIV stock appears appropriately priced, it is helpful to see how F5’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 2/9/2024
[2] Cumulative total returns since the end of 2016

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.