Over the past six months, F5 has been a great trade. While the S&P 500 was flat, the stock price has climbed by 12.7% to $293.01 per share. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in F5, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is F5 Not Exciting?
Despite the momentum, we're cautious about F5. Here are three reasons why there are better opportunities than FFIV and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, F5’s 3.5% annualized revenue growth over the last three years was weak. This fell short of our benchmark for the software sector. 
2. Recurring Revenue Slipping as ARR Falls
While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.
F5’s ARR came in at $175.5 million in Q1, and it averaged 8.3% year-on-year declines over the last four quarters. This performance was underwhelming, showing the company lost long-term deals and renewals. It also suggests there may be increasing competition or market saturation. 
3. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect F5’s revenue to rise by 3.6%, close to This projection doesn't excite us and implies its newer products and services will not accelerate its top-line performance yet.
Final Judgment
F5’s business quality ultimately falls short of our standards. With its shares topping the market in recent months, the stock trades at 5.7× forward price-to-sales (or $293.01 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of our all-time favorite software stocks.
Stocks We Like More Than F5
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