Overbought F5 Networks signals reversal ahead of results

The stock of internet traffic and content management solutions provider F5 Networks Inc. (NASDAQ: FFIV) recorded a yearly high of $148.34 in the second-half of December.

This amounts to a gain of 49.3% y-o-y. This is truly spectacular because the internet software industry as a whole witnessed a negative growth of 6.7%.

One of the main reasons for the appreciation in the share price is the fourth-quarter non-GAAP net income of $140 million or $2.11 per share that beat the Wall Street estimates of $1.94 per share by a wide margin.

However, a quick look at the chart will reveal that the stock is losing momentum. While the stock of F5 Networks appreciated by about $24 between October 26th and November 26th, the gain was only $4 between November 26th and December 26th. Thus, we can argue that the next rally may happen only if the company comes out with exceptional results.

F5 Networks, Inc.

F5 Networks is expected to report its fiscal 2017 first-quarter results on January 25th. The company, which is known for its BIG-IQ platform that facilitates customer to manage devices and services they deliver, has issued a GAAP earnings view of $1.40 to $1.43 per share for the first-quarter. Excluding charges, the provider of secure web gateway services, anticipates non-GAAP earnings of between $1.92 and $1.95 per share.

The company has posted an average positive earnings surprise of 3.37% in three of the last four-quarters. Furthermore, the GBB (Good, Better, and Best) pricing strategies is expected to bolster the revenues in the quarters to come. Analysts anticipate earnings of $1.53 per share in the current quarter. This translates to an earnings growth of 15.92% on y-o-y basis. However, the financial ratios suggest that the stock is already overpriced, relative to historical valuations. The five year average PE ratio of the stock is about 27.2, while the current PE ratio is 25.6. Similarly, the five year average price to book value ratio is only 6, while it is 7.7 based on yesterday’s closing price of $14.. The price to cash flow is also near the historic (5yr) average of 14.42.

It should be also noted that only 6 (or 19%) of the 31 analysts covering F5 Networks have given a ‘hold’ rating. It can be remembered that Nomura has downgraded the stock to “Reduce” rating on December 21st. Thus, fundamentals of the stock call for a correction in the near-term.

The stock has failed several attempts to break above the resistance level of 146. The stochastic oscillator has also started to descend, after remaining in the bullish zone for the past two months.

So, trading a low or below contract would be prudent at this point in time. The low or below contract should be purchased before the stock declines below $143.80. To increase the chances of success, the trader should select January 19th as the expiry date.