Is F5 a Value Play or a Growth Risk?

NEW YORK (TheStreet) -- As an unabashed cheerleader of network giant Cisco (CSCO), liking the prospects of one of its chief rivals, F5 (FFIV), has not always come easy.

Competition is one thing. However, as someone who constantly worries about growth stocks trading at high multiples, I can't help but think that at current levels, F5 just might present a considerable amount of value here. The only question being, is it worth the risk?

Wall Street has been burnt over the past five years betting precisely against growth stocks such as F5 -- names that include the likes of Amazon ( AMZN) and Salesforce.com ( CRM).

That and the fact that my recent bet against F5 backfired so terribly, it has caused me to want to look at the company from another angle. Call it insanity. But what I've discovered is that not only does the company have a promising future, but more impressively it has a competent management team filled with confidence.

The company continues to log quarterly performances that suggest that not only does it have its act together, but more importantly, it consistently demonstrates to investors that it has no problem growing into its valuation -- expensive or not. What's more, its recent earnings performance somewhat affirmed that its growth expectations have not yet reached the level of "too high" as previously perceived.

Even more impressive was the fact that the company's management didn't sidestep or appear to shy away from its previous projections of 20% growth over the long term. This is despite the company showing weakness in regions such as Europe and Asia.

If there are any concerns that remain in terms of F5's business, it has to be in the area of competition -- where in addition to Cisco, there are other powers such as Juniper ( JNPR), Hewlett-Packard ( HPQ) and Riverbed ( RVBD).

Be that as it may, competition has always been there and F5 has been performing well. However, each of these names shows similar symptoms in their recent earnings and it only takes one to make a drastic move to alter the competitive landscape. The most drastic move any of them could make would be to lower prices in hopes of securing market share or disrupting margins.

Both Cisco and HP could do something like this while maintaining their single-digit growth performances. After all, they have the benefit of being in other businesses outside of F5's market.

So as promising as F5 appears today, could investors stomach declining margins for a stock trading at twice the forward price-to-earnings ratio of Cisco and four times that of HP? In other words, when considering F5 at current levels, investors have to decide does it present exceptional value or is it merely a growth risk?

One thing is certain: the company is just not going to suddenly stop growing. In assessing the company's investment worthiness, one has to start looking to where the market is heading -- particularly in areas such as cloud computing and virtualization -- areas where F5 has not only excelled, but has more than doubled its revenue over the past five years.

One of its underappreciated strengths is its high-tech multiprocessors that provide corporate IT services to companies. This helps IT departments use off-site data storage and also helps corporations exercise safety from the standpoint of data processing.

There is also its lead in the core ADC market -- one where (according to Gartner) it has over 60% market share ahead of even Cisco. All of this indicates that expensive or not, this is a risk worth taking.

At the time of publication, the author held no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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