Once again, it looks like we have a summer of discontent for tech stock investors, as economic issues in Europe, the slowdown in China and the not-so-unusual summer malaise weigh on financial results and stock valuations. While networking equipment company F5 (Nasdaq:FFIV) has shown that it's not immune to these issues, the company's performance is holding up relatively well. Though not by any means a safe play or a value stock, investors ought to consider buying shares during this lull.

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Q3 Results Not Perfect, but Not Awful Either
Amidst much fear that F5 would succumb to slowing hardware trends and produce a "miss and lower" quarter, the company ultimately came through alright.

Revenue rose 21% from last year and nearly 4% from the fiscal second quarter, fueled by 31%/8% growth in services that offset 15%/1% growth in products. Looking at customer verticals, government sales were quite strong (up 52% and 4%), while telco and tech were quite weak (both declining by double-digit percentages from the prior quarter).

One of the things I love about F5 is that it is a cloud play that actually shows positive operating leverage. Gross margin (GAAP) improved both annually and sequentially, while operating income rose 25% and 10% versus last year and last quarter, respectively.

SEE: Understanding The Income Statement

Guidance - Well, It Could Have Been Worse
F5 did fulfill the Street's expectation for lower guidance. With a book to bill of "slightly" below 1.0 (apparently 0.99) and ongoing macro pressures, F5 management lowered revenue guidance for the next quarter by about 3% relative to prior expectations. Overall, that could have been worse, though we'll need to hear from rivals such as Cisco (Nasdaq:CSCO), Riverbed (Nasdaq:RVBD) and Citrix (Nasdaq:CTXS) to really put F5's performance and guidance into context.

Competition Is There, but So Is the Market Opportunity
F5 is at a point in its lifecycle where investors are starting to worry less about who F5 can take share from and more about whose coming in to challenge F5. The company recently lost its head of sales to Palo Alto Networks, and it's likely only a matter of time before these companies are going head-to-head in the security space. Likewise, Riverbed (Nasdaq:RVBD) and CheckPoint (Nasdaq:CHKP) (not to mention smaller private companies) are going to fight the company for business in the ADC and security hardware markets.

I don't see how or why this would be a surprise. Worthwhile markets usually attract competition; that's sort of how capitalism works. At the same time, I wouldn't underestimate the demand development for F5's products. The ability to quickly manage traffic between internal networks and clouds is only going to increase in importance, and desktop virtualization (if it happens) and increasing data demand from smart devices like the iPhone should keep the ADC market healthy for several more years.

SEE: A Primer On Investing In The Tech Industry

The Bottom Line
Eventually, the F5 growth party will peter out - it happened for IBM (NYSE:IBM), it happened for Cisco and it will happen for F5. I just don't think it's going to happen in the next couple of years; macro issues may lead to a slow year here and there, but baseline demand still looks strong.

If there's a downside for me to F5, it's that the stock is just too popular. Almost every major sell-side analyst likes this company, and those who don't recommend the stock typically base that on valuation, not fundamental performance. Therefore, the problem for me is that everybody seems crowded onto one side of the teeter-totter, and I think we all know what happens when folks start to jump off.

All of that said, I do like these shares. No, a stock trading at six times trailing sales is not cheap, and forward expectations of compound free cash flow growth of 12% are not conservative. Nevertheless, I do believe these shares are worth something in the $130s and I like to buy tech growth stories like this on the periodic knockdowns that come with the territory.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Tickers in this Article: FFIV, CTXS, CSCO, RVBD, CHKP

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