Invest in F5 Networks

F5 Networks (FFIV) had its first success with the BIG-IP. This load balancing appliance was designed to reroute traffic so that if one server went down or was overloaded, input was diverted to another that could handle the traffic. Load balancing allowed internet companies to handle more traffic with fewer server computers, and immensely increased the reliability of their communications.

On the strength of their popular product, F5 Networks went public in 1999. Being the first mover in the field and first to go public gave the company and its stock a competitive advantage. In 2010, it was listed as one of Fortune Magazine’s Fastest Growing 500.

Since then, the company has continued to grow, partly through acquisitions of such companies as uRoam, Swan Labs, and Magnifire, and also organically. Its Big-IP appliance now headlines a suite of applications to increase network security, usability, and speed.

Through internal development as well as acquisitions, the company continues to extend its product line. It is a market leader in Application Delivery Networking, its main field of expertise. F5 Networks provides appliances and virtual appliances, server-based programs that work as if they were separate machines. These tools improve the performance of data storage devices and servers. Add-ons to its BIG-IP allow users to filter email, compress files intelligently, encrypt and un-encrypt files, and manage local traffic.

The large competitors Seattle-based F5 faces are Citrix Systems (CTXS) and Cisco Systems (CSCO). The smaller competition includes private companies Array Networks, Barracuda Networks, and Coyote Point Systems, from the San Francisco Bay Area. Zeus Technology, a subsidiary of Riverbed Technology (RVBD), is based in England.

One competitive advantage F5 enjoys is its size. It is small enough to be nimble compared to Cisco and Citrix, and is focused on the innovations that have grown out of its load balancing business. On the other hand, as a public company, it is larger and more evolved than direct competitors like Coyote Point Systems.

F5 stock went public at $10.00 in June of 1999, and climbed to above $143 in December of 2010. However, it finished 2011 slightly lower, and now sits at about $134. The stock has been good to people who bought and hung on. The question is whether it’s a buy now. The price to book is near 15, with a trailing P/E above 43, according to Yahoo. However, the Riverbed (RVBD) P/E is above 73, according to the same source.

In addition, F5 Networks’ growth is still splendid. At the January 18 Conference call, the company reported it beat estimates for growth and earnings per share. The business was extremely profitable, with GAAP gross margins of 82.8%. The company also expects to add 125 new employees in 2012.

On the transcript at Seeking Alpha, CEO John MacAdam describes the company’s results as solid and himself as pleased. With popular products worldwide, the company is opening a new product center in London to supplement the Seattle center. According to Mr. MacAdam, “F5 solutions are being used more and more in data centers throughout the world as strategic control points to secure and optimize mission critical applications.”

He continued, “Assuming no major change in the micro-economic environment, we expect to deliver product revenue growth acceleration in this coming quarter. We also continue to target year-over-year total revenue growth of at least 20% in fiscal 2012.”F5 Networks makes appliances and virtual appliances that internet companies need. Their tools increase security and speed while lowering costs. Other small companies are in the same business, along with Cisco, but F5 is smart and agile and the global customer base is expanding rapidly. It’s hard to see how the company could stumble any time soon.