By David Gross
In spite of a flat to down market today, F5 hit a 52 week high this morning of $141.58, and has nearly tripled over the last 12 months. It's also up over 50% from Goldman's peculiar downgrade of the stock in October. While F5 is a great company that has done an excellent job staying focused on the L4-7 market, the stock is getting ahead of itself.
Since 2003, the company's top line has grown 26% annually, but its current y/y growth rate of 45% is near its post dot com crash peak of 47%. It's no secret on Wall Street or in the data center industry that there's a lot of room for both load balancers and WAN Optimization devices to keep growing, but they're not going to keep growing at close to 50% per year, which is what the current enterprise value/earnings ratio of 55 suggests. That said, this is purely a short-term risk, not unlike the spring and summer of 2006 when the stock lost nearly half of its value as its revenue growth rate decelerated from the high 40s into the low 30s. But investors who held on through that volatility are being rewarded now, and anyone planning to benefit from future growth needs to be ready to handle a 2006-like drop with current revenue growth running so far above historical levels.