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 a 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 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 involves 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 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.
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.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
