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F5 Is Set to Thrive

A strong brand and sticky services businesses combine to ward off competitive threats.

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 F5 Networks (FFIV) announced its intent to acquire privately held Nginx, a provider of open-source software for application delivery controllers and microservices, for $670 million of cash by acquiring all issued and outstanding shares. Nginx and F5 were competitors in the ADC marketplace, with Nginx focused on software-based solutions to disrupt F5's traditional hardware dominance. We view this acquisition as in line with F5's strategic efforts to focus on software with cloud-based and virtualized products. Management expects fiscal 2019 and fiscal 2020 to now see increased revenue growth with lower non-GAAP operating margins and non-GAAP earnings per share growth. After updating our model, we are maintaining our fair value estimate of $181 per share.

Nginx is a leader in the web application server, microservices, and API management side of development operations, whereas F5 excels at routing and managing the applications for the end users. F5 will now be able to offer a more complete solution for application and traffic management, from the developer side to the networking side. Per Nginx and Internet services company Netcraft, over 374 million websites (around 25% of total) used Nginx software in February and 67% of the top 10,000 sites ran on Nginx (per W3Techs data). This massive installation base should provide potential incremental opportunities for F5 to manage the flow of applications after application development for multicloud deployments, in our view. Additionally, we think F5 benefits from purchasing a company that's garnered success with a cloud and virtualized model, since F5 aims to make inroads into those markets.

Mark Cash does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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