F5 (FFIV): Momentum Broken, Or a Chance to Buy?

Following lackluster earnings and guidance after the close, momentum stock F5 Networks (Nasdaq: FFIV) is under heavy pressure and it is sending shock waves throughout momentum land. Now investors are asking themselves if this is a great opportunity to buy or is the momentum broken.

Shares of F5 last traded at $112.41, down 19 percent from the close. The downside action has spilled over to like-companies including Riverbed Technology (Nasdaq: RVBD), Blue Coat Systems (Nasdaq: BCSI) and Rackspace (NYSE: RAX), down 9.5, 7.5 and 4.9 percent respectively.

F5's number weren't bad, but they just didn't live up to the lofty expectations. The company reported adjusted first quarter EPS of $0.88, above the consensus of $0.82. Revenue for the first quarter was $268.9 million, just below the consensus estimate of $270.36 million. The company sees second quarter EPS of $0.84-$0.86, versus the consensus of $0.85 and sales of $275-$280 million, just shy of the $280.72 million consensus.

First quarter revenues rose 40.7 percent from last year, but just 5.8 percent sequentially. Non-GAAP EPS rose 69 percent from last year, but 11.4 percent sequentially.

The huge secular move in the the data center has benefited F5, but on its conference call the company indicated weaker seasonal demand and said the sizes of deals were smaller.

Surprisingly, despite the mediocre quarter, two analysts upgraded shares of F5 this morning, suggesting that today's weakness is a great opportunity to buy the name.

Gleacher & Co., which downgraded F5 in October of 2010, upgraded shares today to Buy with a $130 price target. Gleacher said despite the miss, F5 remains the dominant force in a secular growth market for application delivery controllers. On top of the 40 percent year-over-year revenue growth, the firm sees revenue growing another 20 percent in 2011 on expanding margins. This could boost EPS growth near 30 percent, the firm contests. Gleacher said Wall Street is overreacting to a "bump in the road."

Credit Suisse also upgraded shares today, from Neutral to Outperform with a $134 price target. The firm saw no meaningful change in F5's revenue or earnings growth outlook. They said the company will continue to set the pace with revenue and earnings growth.

Veterans on Wall Street know that when momentum breaks, buying shares are like catching a falling knife --- there are not too many ways to do it without being cut.

So is momentum broken?

Looking at the numbers and growth projections for F5, the simple answer is "No." However, the company will not be given many more chances. If investors smell another whiff of data showing that demand is slowing then FFIV's premium 32x multiple could be gone overnight, replaced with a normal market multiple near 20x, which could mean another $40 haircut.

UPDATE: Click here to see some highlight's from F5's Q1 conference call.

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