Bank Of America Downgrades F5 Networks, Negative Secular Trends Too Large To Ignore

F5 Networks, Inc. FFIV has been facing prolonged pressure on revenue growth due to the secular shift in demand from appliance-based Application Delivery Controllers (ADC) to software and cloud-based solutions, according to Bank of America Merrill Lynch.

The Analyst

Tal Liani downgraded F5 Networks from Buy to Underperform, while lowering the price target from $185 to $140.

The Thesis

The negative secular trends have translated to pricing pressures for F5 Networks, as well as competition from new entrants into the market, Liani said in a note.

He added that the company was now facing competition from the likes of VMware, Inc. VMW, Amazon.com, Inc. AMZN and Alphabet Inc GOOGL as well as from content delivery network (CDN) providers like Akamai Technologies, Inc. AKAM.

The analyst explained that the ADC market was going through a fundamental change, which put pressure on legacy players. Instead of purchasing hardware appliances with a pre-set capacity level, enterprises were now considering options that offer greater flexibility and on-demand consumption.

“We also flag near-term risks to estimates stemming from unsustainably high software growth rates and high concentration of Federal orders in the last quarter which mask greater declines,” Liani wrote in the note.