Over the last six months, F5’s shares have sunk to $258.88, producing a disappointing 12% loss - a stark contrast to the S&P 500’s 11.3% gain. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is now the time to buy F5, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free for active Edge members.

Why Is F5 Not Exciting?

Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons we avoid FFIV and a stock we'd rather own.

1. 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 $185 million in Q3, and it averaged 12.3% 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.

2. 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 1.6%, a deceleration versus its 5.5% annualized growth for the past five years. This projection doesn't excite us and indicates its products and services will face some demand challenges.

3. Operating Margin Rising, Profits Up

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Looking at the trend in its profitability, F5’s operating margin rose by 1.4 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 24.8%.

Final Judgment

F5’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 4.8× forward price-to-sales (or $258.88 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. Let us point you toward a dominant Aerospace business that has perfected its M&A strategy.

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