Undeniably, 2019 has been a strong year for technology stocks. The tech-heavy Nasdaq was recently up just over 30%, but it’s important to remember that the stock market and the major indexes are really a market of stocks. Some multi-billion companies have underperformed peers, and others actually have seen their shares take it in the chin. F5 Networks Inc. (NASDAQ: FFIV) has fallen into both categories. After closing out 2018 at close to $160, its shares most recently closed down about 10% on the year at $143.58. Then things went from bad to worse after a key analyst, who was previously positive and above-consensus, decided that it was time to play the Benedict Arnold game with F5 Networks.
Merrill Lynch’s Tal Liani had a Buy rating and a $185 price target that was about $20 higher than the consensus analyst target price, and was only about 3% or 4% shy of having the highest price target on Wall Street. That’s all history now. Liani issued a rare two-notch downgrade, skipping Neutral and taking the stock to the dreaded Underperform rating. That’s a Sell rating equivalent at other firms. The above-consensus price objective was taken all the way down to $140.
The Merrill Lynch report’s tag-line was “Existential hardware decline too big to ignore,” and that was too big for investors to ignore as well.
While the new valuation is based on about 13 times the expected 2021 price-to-earnings ratio, down from about 16.5 times, Merrill Lynch does not see it as a value stock despite having a sub-market multiple. Liani has cited prolonged pressure on revenue growth coming from a secular shift in demand from appliance-based application delivery controllers (ADCs) to software and cloud-based solutions. According to the report, this has pressured its pricing power at the same time