F5 Networks to Rise Further on News of Probable Sale

F5 Networks to Rise Further on News of Probable Sale
June 15, 2016

Last week, F5 Networks, Inc. (NASDAQ:FFIV) saw a 12% appreciation in its share price, following the news that the computer networking company has retained Goldman Sachs to negotiate with enterprises, which have shown interest in acquiring it. However, the share price has lost about 4% from the peak price of $124.91 touched last week. Irrespective of the outcome of the negotiations, we have a short-term bullish outlook on the stock because of the following reasons.

The Seattle, Washington-based company providing networking services has chosen Goldman Sachs, a top rated investment bank, for negotiations. This indicates that the company has received proposals from top notch companies. If the deal materializes, the acquisition price will be at a premium to the prevailing market price.

A research report by Gartner indicates that F5 Networks remains a leader in the ADC (Application Delivery Controller) market. However, the growth has fallen to mere 6% in the past three years, from 29% growth recorded between 2010 and 2012. Thus, it becomes very important for the company to find ways to maintain a growth momentum. This can be achieved by merging with any of the networking giants such as IBM, Cisco, Dell, Hewlett Packard Enterprise or Juniper.

Before cloud computing arrived, the growth in the ADC market was directly proportional to the deployed web applications. However, traditional load-balancers are replaced by installing high performance applications in the cloud. For example, the elastic load balancing technology used by Amazon does not need any specialized hardware at all. Thus, cloud-based load balancers are expected to gain market share, which involve big IP-based products. Such a scenario would seriously affect the growth of F5 Networks and it needs an alternative to bridge the probable revenue decline.

The company is also expected to record short-term revenue growth because of the product refresh cycle. F5 Networks has not revealed any details about the new product developments. So, a comprehensive estimate of the probable gain in revenue cannot be provided. Still, it is considered a positive development that would increase the value of the company.

It should be noted that similar acquisition news has cropped up in the past. However, none of them materialized. However, it can be argued that the scenario is different this time and F5 Networks would certainly do its best to sell itself considering the challenges it faces. Thus, fundamentally, we can expect the share price to rise further in the near term.

The chart reveals that the stock has a major support at 116.50 levels. The RSI reading of 63 is higher, but indicates bullishness in the stock. Thus, we can expect the share price, which closed at $118.08 on Tuesday, to retest the support and bounce off of it.

F5 Networks Co - Technical Analysis - 15th June 2016

So, a one touch call option seems to be the perfect trade at this point in time. The trader should also select a strike price in the range of $126 to $128. Finally, an expiry period in mid-July would give ample time for the price action to hit the desired price.


Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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