Last week F5 reported its latest quarterly results and after three straight "beat and raise" quarters it was slightly behind where Wall Street was expecting. Additionally, the company guidance was a little lighter than expected. This prompted typical over reaction from Wall Street and the stock dropped from about $145 per share to $110 and the speculation that F5 has run out of market. Now I don't do stock evaluation, I'll leave that to another set of analysts, but I do believe F5 has another wave of growth on the horizon.
One of the major issues surrounding F5 is that its total addressable market (TAM) is very difficult to measure. It’s currently the market share leader in application delivery controllers (ADCs) with about 50% share. Cisco is second with about 30% share and with the loyalty Cisco tends to have in much of its base, it is logical to assume that F5 growth through share gains will be limited. I would argue though that the TAM for F5 will grow at an increasingly faster rate based on how the ADC is positioned today versus just a few years ago.
I've thought a lot about how big F5s TAM is over the past six months and I’m not sure how to put a dollar figure on it but I'd like to offer some thoughts as to how to at least think about the TAM and why I think there's still a fair bit of room for growth for F5. The main thing to consider is that the role that F5 plays is much broader than it did even five years ago so its addressable market has grown along with it. Here are the major factors that should contribute to the F5 TAM growing at a rate that will allow F5 to sustain its current growth trajectory:
Application relevancy. The current-day ADC grew from the traditional "load balancer" where the F5 product would sit in front of a bank of servers and move traffic to load balance it. Today, the ADC has a high degree of application relevancy and plays an important role in the optimization of specific applications such as Exchange, Oracle, and Share Point. This means in any data center you’'ll find an F5 box in front of each of the server farms that delivers the applications. The more applications that F5 becomes relevant to, the bigger the opportunity for F5. The applications that have driven the most revenue for F5 over the past few years have been Share Point and Exchange. Microsoft Lync (formerly OCS) presents a brand new opportunity for F5 within enterprises.
Virtualization. When companies started to adopt virtualization, the number of physical servers deployed in data centers began to shrink. Initially, the common thought was that virtualization was bad for F5. Fewer servers means fewer ADCs, correct? Well that turned out to be incorrect. It turns out that organizations need to route traffic to the various servers whether they are virtual or physical. As virtualization has matured, many organizations find that they have more virtual servers than they had physical servers prior to the virtualization initiative. So, virtualization has actually grown the total number of servers (physical plus virtual), which has driven the need for more and bigger data ADCs. This is a trend that will continue and will contribute to the continued growth of F5.
The telco and wireless opportunity. Telcos and wireless operators today are application delivery providers. However, instead of delivering to a few thousand users, like a corporation, they are delivering applications to potentially millions of users. Also, instead of Exchange and Share Point, the applications being delivered are video and cloud based services. This puts a premium on the performance of the data centers that delivers these applications. This is the reason that F5's telco business has been booming over the past year or so. F5 has built a robust set of partners to deliver solutions to this audience, and I expect this to remain a high growth opportunity for F5 for years to come. Additionally, I think F5's next acquisition will be one of the partners that F5 works with in this market.
From a high level, F5's market opportunity can be thought of as "enterprise" and "telco". But in actuality, F5's total addressable is actually made up of several markets layered on top of one another, each at different points of maturity. What F5 has done, and I believe they will continue to do, is to continually find new opportunities for growth faster than its more mature opportunities fall away. Ultimately, if F5 can continue to execute on this, its total addressable market tomorrow will be bigger than its addressable market today which will allow the company to continue to outperform the competitive landscape.
