F5 Increases Product Delivery in Q4, Faces High Costs to Meet Demand; Maintaining $199 FVE

We maintain our $199 fair value estimate for narrow-moat F5 after its fourth-quarter results slightly exceeded our expectations for revenue and adjusted earnings. We remain confident in F5’s plan for growth and margin expansion by expanding its software and application security portfolio. After releasing results, shares traded down over 4%, which we believe is the result of margin contraction. We view this as an overreaction when considering the contraction is predominantly the result of increased component and expedite costs from the broker market. There was also continued demand for its systems products, and despite a significant order backlog, F5 has seen extremely few to no order cancellations. We view shares as undervalued and expect to see F5 work down its order backlog through the first half of its fiscal 2023 while continuing to grow its margin-accretive software business.