Friday, October 8, 2010

Goldman Sachs Moves F5 Networks (FFIV) to Sell

Uh oh, it looks like the analysts - being the momentum chasers they are - have turned on cloud computing stocks*.  As long as they were going up non stop, not a peep.  The minute they show weakness, it's time to talk about reality.

*I don't consider F5 Networks to be a cloud stock, although the Street has deemed it as such; it is a networking company in the arena of a Cisco Networks.

Goldman is out with a rare sell.  In Wall Street parlance even "neutral" / "hold" means sell (which was the old rating) so this analyst has obviously missed the train on FFIV.  She now has taken the rating from (translated Wall Street lingo) "sell" to (translated) "I mean it, sell"!

The stock is down 5% in premarket and could soon threaten support; if it breaks decisively below that 50 day it turns from a bullish/neutral setup to bearish.  Like so many stocks it only has miles of 'vapor' as support once it breaks through these important levels, due to the 'straight up' run.  It is not even in the same zip code as the 200 day moving average.

Via Barron's:

  • Goldman Sachs analyst Simona Jankowski this morning cut her rating on F5 Networks (FFIV) to Sell from Neutral. Her target on the stock is $80, well below yesterday’s close at $98.98.
  • Jankowski notes that the stock is up 84% year to date, “largely drive by multiple expansion,” along with a 24% increase in Street estimates. She notes that FFIV now has a P/E of 32x - 25x on an option-adjusted basis - “which we think represents a view of the stock as a key cloud vendor with a significant M&A premium.
  • But Jankowski adds that her analysis suggests that 85% of the company’s growth comes from server refresh and share gains, rather than cloud build-outs. Her conclusion: “this puts its growth trajectory in 2011, and thus multiple, at risk.”

That last point is so important - every stock now with even 10% of their business having to do with the cloud has now been christened "a cloud play:, and their PE multiple has expanded like mad.  It is nonsense - but fighting nonsense while the bulls are in a fervor only creates losses for your P&L.   As always, facts on the ground only matter when they matter.   In a few days (weeks? months?) this will be forgotten and F5 will be talked up as a wonderful cloud company, that hundreds of companies are clamoring to buy.  I am not disparaging the stock - I've been around it on and off for a decade... I am just bemused by the "cloud" fanaticism; in truth there are realistically 4-5 'cloud' stocks - everything else being run up in the group is just for speculative convenience.

p.s. it looks like today the hot money has moved from the cloud to fertilizers - every day, a new theme.

Long F5 Networks in fund; no personal position

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