If premarket indications are accurate, folks who bought shares of application delivery company F5 Networks (Nasdaq:FFIV) thinking that the mid-$90s would be a floor are going to see a decent return for stepping up to buy. That said, bears seem poised to portray this as more of a "less bad than feared" quarter, as opposed to real outperformance.

What's more, with weak sequential growth becoming more of a trend now, it is fair to wonder if the hot growth phase is over for F5. Clearly there is plenty of business yet to be won and the story is by no means over, but a shift to a less frenzied pace of growth will likely mean new multiples for this stock and perhaps a different shareholder base than before.

TUTORIAL: Fundamental Analysis

Fiscal Second Quarter Brings Growth and Relief
F5's growth in its fiscal second quarter was either great or just okay, on the basis of which numbers an investor uses. Compared to last year, revenue jumped almost 35%. Sequential growth, though, was more on the order of 3% - suggesting that F5 has basically caught up with the IT capital equipment under-spend of the recession. Within the total revenue figure, product growth was 34% on an annual basis, while just a bit over 1% on a sequential comparison.

Performance is likewise bifurcated on the profit side. Gross margin ticked up almost two points from the year-ago level, but slid just a bit on a sequential basis. While operating income grew 67% to $83.2 million for the three months ending March 31, 2011, compared to the same period in 2010, sequential growth was more on the order of 4.2%, and the operating margin contracted sequentially. (Find out how to put this important component of equity analysis to work for you, in Analyzing Operating Margins.)

All things considered, this is a result that will probably bring some relief to investors. The impact of Japan's earthquake on the business appears to be less than feared, and the company did post a better book-to-bill ratio and an increase in large ($1 million+ deals).

Growth Versus Competition Versus Execution
It would seem that there should still be many years of growth in the market for application delivery controllers (layer 4-7 switches), not the least of which because of the ongoing roll-out of cloud networks and the adoption of the software-as-a-service model by many companies. What's more, while the company's ARX line has yet to deliver much of anything, there's still the possibility that it will validate itself and have a role in markets like storage virtualization.

Even if the market continues to grow apace, there are still competitive threats to F5's business. Companies like Cisco (Nasdaq:CSCO), Citrix (Nasdaq:CTXS), Brocade (Nasdaq:BRCD), Juniper (Nasdaq:JNPR) and Riverbed (Nasdaq:RVBD) are active in various parts of F5's targeted markets. While F5 currently enjoys a very good reputation for product quality and features, a re-focused Cisco (if such a thing is possible) could be a threat and the convergence of WAN optimization could likewise be an opportunity for Riverbed or Juniper.

Along the way, figure on chip companies like Cavium (Nasdaq:CAVM) and Broadcom (Nasdaq:BRCM) to have some interest in the proceedings - both are relatively diversified among the would-be ADC players, and stand to benefit so long as the overall market continues to grow.

The Bottom Line
Contrary to how this all likely sounds, F5 could do quite well. The trouble, though, is that we have seen what happens to high-multiple companies, as they transition to a slower pace of growth and it usually is not a pretty process. Momentum investors move on to new markets and players, while value investors are hesitant to approach. That winnows the available pool of shareholders, and it can take a while for the new multiples to work themselves out. All of that said, the biggest question now is whether F5 has more or less maxed out its margin leverage and its free cash flow margin. Without more juice there, the shares do not look all that compelling at today's prices. Still, were the shares to drop into the $90s again, they would be well worth a look for growth investors willing to pay a reasonable price for what is likely to be many more years of above-average performance. (Momentum can be used with other tools to be an effective buy/sell indicator. See Momentum Indicates Stock Price Strength, for more.)

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