Bear Market Continues in Networking Names; F5 and Radware Plunge on Slashed Outlook

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On Thursday, April 4, leading networking company F5 Networks (NASDAQ: FFIV) lowered its fiscal second-quarter financial guidance. On Friday, investors reacted to the news by dumping the stock as F5 closed the session with a 19% loss and is now sitting near new 52-week low levels. The disappointing guidance also caused caused some moderate weakness in other networking names such as Juniper Networks (NYSE: JNPR) and Riverbed Technology (NASDAQ: RVBD).

Unfortunately for investors with exposure to the networking sector, F5 was not the only company to deliver bad news. On Friday morning, much smaller competitor Radware (NASDAQ: RDWR) also cut its outlook for fiscal Q1. That stock plummeted almost 23% on the final trading day of the week. The downbeat, updated forecast for both F5 and Radware underscores the ongoing bear market in the entire sector despite very healthy gains for the major averages.

Bull Market Turns Into a Bear

Coming out of the financial crisis, the networking space was one of the hottest places in the stock market. Despite experiencing heavy losses over the last year, F5, Riverbed, and Radware have still managed to record huge gains during the last five years after rallying sharply between late 2009 and early 2011. Juniper Networks, on the other hand, has seen its share price fall around 27% during that time.

On the five-year chart, F5 shares have surged more than 300%, while Radware is up roughly 190% and Riverbed shares have appreciated 127%. The losses in these stocks over the last 52-weeks, however, have been steep and there are few signs that the bear market in networking stocks will reverse course in the near-term. The biggest losers over the last year have been F5 and Riverbed with each stock losing around 46% of its value.

In light of the slashed guidance at F5 and Radware, this remains a sector that investors should approach with caution. Below, we examine the updated outlooks for F5 and Radware along with the reaction from Wall Street analysts, which has not been good.

F5 Slashes Q2 Outlook; Cites Sequestration and Slowing EMEA Sales

Seattle-based F5 Networks now expects second-quarter adjusted earnings per share of $1.06 to $1.07, which compares to its previous adjusted EPS guidance of $1.21 to $1.24. Revenue for Q2 is now expected to be $350.2 million -- well below the company's previous sales outlook of $370 to $380 million. Chief Executive Officer John McAdam cited a slowdown in North America, and to a lesser extent, slowing sales in Europe, the Middle East and Africa for the disappointing forecast.

Specifically, the company said that lower domestic government sales, partly due to the automatic spending cuts that went into effect in March, along with a slowdown in spending by domestic telecom service providers like AT&T and Verizon negatively impacted F5's financial results for the most recent quarter. “Telco bookings were down sharply on both a sequential and year-over-year basis,” CEO John McAdam said in a statement. “U.S. federal sales were also down significantly from the second quarter a year ago.”

These trends could effect a host of other companies. Juniper Networks, for example, has significant exposure to the telecom market and falling government spending could hurt Riverbed Technology. Other networking stocks that closed lower on Friday in sympathy with F5 and Radware included Aruba Networks, Ciena, Citrix Systems and Fortinet.

Radware Follows F5; Preliminary Q1 Results Disappoint

Reuters reported that more than a dozen brokerages cut their price target for F5 in the wake of the news and the stock was also downgraded at a number of firms. On Friday morning, competitor Radware piled on with more bad news as the Tel-Aviv-based networker announced disappointing preliminary results for its fiscal first-quarter. The company said that it now expects adjusted earnings per share of $0.30 compared to its previous guidance of $0.40 to $0.43 per share.

Its revenue outlook now calls for sales of $45 million versus a previous forecast of $48.5 million to $49.5 million. Wall Street analysts had been expecting Radware to report EPS of $0.42 on revenue of $49.23 million. Chief Executive Officer and President Roy Zisapel said "while we realized strong sales in the U.S. market during the first quarter of 2013, the company experienced weaker than expected results in EMEA and China."

Analyst Reaction

Analysts at Oppenheimer said in a research report that they were surprised by the preliminary results released by Radware and the firm cut its price target from $43 to $35. Despite the disappointment, however, Oppenheimer maintained its "Outperform" rating on the stock. The analysts wrote, "despite positive checks, Radware followed F5 and negatively pre-announced March-quarter results." They added that "we did believe Radware was executing better than others" and noted the rising trend of missed estimates in the networking sector.

Wall Street saved its harshest reaction for F5. In addition to cutting price targets and estimates, a slew of brokerage firms outright downgraded the stock, including Citigroup, Topeka Capital Markets and Piper Jaffray. Analysts at Goldman Sachs, however, maintained their "Buy" rating on the stock citing strengthening catalysts, but they nevertheless slashed earnings estimates and lowered their price target on FFIV to $98 from $111.

They wrote, "we were wrong to expect that F5 could meet F2Q expectations. We maintain our Buy rating as we continue to believe that beginning in F3Q, F5 will start to meaningfully benefit from the 1) BIG-IP product refresh and 2) Cisco market exit displacements."

Analysts at ISI argued that going forward it may be difficult for F5 to maintain its historic 20% revenue growth rate due to shifting networking trends which could cause the company to lose market share. They specifically mentioned competitors Cisco, Juniper Networks and Riverbed Technology as potential threats in certain business lines. Investor reaction on Friday, however, suggests that Wall Street is more focused on broad sector headwinds and the bad news for F5 and Radware is not necessarily good for competitors, even if they are taking market share.

Falling Share Prices May Offer Opportunity for Long-Term Investors

While the huge sell-offs in both F5 and Radware underscore the ongoing bear market in network names, most of these stocks still remain sharply higher on a much longer-term basis. The color provided by Wall Street analysts also suggests that while there are near-term headwinds for the sector, investors with a multi-year time horizon could wind up doing well in stocks such as Radware, F5 and their competitors.

For example, analysts at Wedbush wrote in a client note about F5 that "despite a longer timeline than we had originally anticipated, we believe that the company can deliver on the new product cycle and advise that longer-term investors own the name." Going forward, investors should expect the networking sector to continue to be under pressure, but negative sentiment and falling prices may provide bargain hunters with some long-term opportunities.

Ryan Glosier has no position in any stocks mentioned. The Motley Fool recommends F5 Networks and Riverbed Technology. The Motley Fool owns shares of F5 Networks and Riverbed Technology. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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