Tickers in this Article: FFIV, CSCO, RVBD, BCSI, JNPR, EMC, CIEN
One of the really tricky aspects of growth stock investing is that overvalued stocks can easily continue to outperform the market and become even more overvalued so long as the company produces enough growth to excite the "valuations don't matter" crowd. The problem, though, is that sooner or later valuations always matter, and that day of reckoning can be painful.

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That would appear to be the case with F5 Networks (Nasdaq:FFIV). F5 is a great company and a leading provider of network traffic management products and services. What's more, the company's earnings/guidance miss was not all that bad. And yet, the stock has recently endured a sharp selloff as investors suddenly question the wisdom of paying more than 12 times trailing revenue for a company whose torrid growth may be cooling.

The Quarter That Was
As suggested, F5's fiscal first quarter was really not that bad. Revenue rose 6% sequentially and almost 41% year-on-year, with product revenue leading the way with 44% growth over last year. Gross margin improved (and stand at an extremely impressive 82.6% level), while operating income grew 7% sequentially (69% YOY) and operating margin improved to over 38 percent. (For more, see Zooming In On Net Operating Income.)

Now the bad news. This quarter broke a streak of six beat-and-raise quarters. Book-to-bill for the quarter was below one. Worst of all, the company gave guidance for the next quarter that suggests sequential revenue growth of 2-4% and a midpoint 1% below the prior consensus.

The Road Ahead
Again, for a normal company these results would not be bad. But F5 is not a normal company or a normal stock. F5, along with Riverbed (Nasdaq:RVBD) and Blue Coat (Nasdaq:BCSI) has been basking in a "cloud premium" for at least the last six months - so much so, in fact, that the average analyst price target on F5 shares has more than doubled from its July level. That's a lot of optimism for any company to redeem.

But is this the end of the line for F5? The company has certainly reaped much growth from taking share from Cisco (Nasdaq:CSCO), so much that it looks like F5 has helped push CSCO's share into the teens in some categories. The thing is, though, that high-end data network traffic management is a growth market and F5's software-based approach really has a lot of attractive aspects. So while the company may find growth a bit more challenging after more than doubling its share in application switches, and may find its entry into storage management to be more challenging than some bulls believe, F5 is likely not about to stop growing anytime soon.

The Bottom Line
F5 is trading around $110 today, which suggests the stock would seem to be at a more or less fair price given some rather aggressive assumptions. More specifically, if the company can grow its free cash flow at a 13% CAGR over ten years (aggressive, but not impossible) and investors apply a market-neutral discount rate, the shares ought to be worth around $105. Oh, and for what it's worth, each additional 1% of 10-year compound annual growth in free cash flow seems to be worth about $5 to the stock price.

Looking around the space, there could be some perceptual risk to Riverbed and Blue Coat, as well as Juniper (Nasdaq:JNPR) and NetApp (Nasdaq:NTAP), but do not underestimate the market's ability to dismiss F5's problems as "company-specific" (even though the real issue is more about valuations and overheated expectations).

Investors looking for better bargains have to think less about growth and more about growth recovery and/or "big tech." Stocks like Ciena (Nasdaq:CIEN), Cisco, and EMC (NYSE:EMC) offer some similar market exposures to F5, but may be better relative bargains. Investors should realize, though, that these companies do not offer the same sort of growth profile as F5. (For more, see Steady Growth Stocks Win The Race.)

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