F5 Inc Make Consistent Free Cash Flow, Making FFIV Stock Attractive to Value Buyers

Mark R. Hake, CFA - Barchart - Tue Jan 30, 11:08AM CST

F5 Inc. (FFIV), a cloud security tech company, yesterday reported strong operating and free cash flow results for its fiscal Q1 ending Dec. 31. As a result, FFIV stock now looks attractive to value buyers and short-put income players.

The stock is up today to $189.2 per share with a market capitalization of $11.1 billion. Based on our analysis, which I will describe below, FFIV stock could be worth 15% more, or over $218 per share.

This analysis is based on F5's high free cash flow (FCF) margins, which were very strong in the latest quarter.

F5's Free Cash Flow and FCF Margins

The company reported on Jan. 29 that its revenue came in at $692.5 million, down slightly (-1%) YoY. However, its non-GAAP operating margin rose 900 basis points from 26.5% to 35.5% in the latest quarter ending Dec. 31.

Moreover, its free cash flow margins also improved dramatically. For example, F5 reported that its fiscal Q1 cash flow from operations was $165.3 million. After deducting $9.1 million in capex spending, it brings the company's free cash flow (FCF) to $156.2 million.

That works out to an FCF margin of 22.6% on its $692.5 million quarterly revenue. That was higher than last year's fiscal Q1 20.6% FCF margin (i.e., $144.5m FCF / $700.4m revenue).

Moreover, over the past 12 months, the company generated a significant amount of positive FCF. For example, its trailing 12-month (TTM) revenue was $2,805 million and from this F5 made $611 million in FCF. That is based on figures from Seeking Alpha, and it represents a TTM FCF margin of 21.8%.

In other words, the company has been gushing strong and consistent free cash flow. Investors can likely count on this going forward and determine its forward-looking value.

Using FCF and FCF Yield Metrics to Set a Price Target

For example, analysts now project that for the year ending Sept. 2024, revenue could reach $2.78 billion. And next year their forecasts are for $2.9 billion. That averages out to $2.84 billion over the next 12 months (NTM) or so.

So, applying a 22.6% FCF margin (its most recent quarterly figure - see above), we can estimate NTM FCF of $641.8 million in free cash flow. That is seen by multiplying 0.226 x $2.84 billion in NTM revenue forecasts.

That makes FFIV stock worth a deal more. For example, applying a 5.0% FCF yield metric to this figure results in a projected market cap of $12.84 billion (i.e., $641.84m / 0.05). That is also the same as multiplying FCF by 20x (i.e., the inverse of 5%).

Since FFIV stock has a market cap of $11.1 billion today, that implies a potential upside of 15.7% (i.e., $12.84b/$11.1b -1 x 100 = 15.67%). This brings the price target to $218.84 per share (i.e., 1.1567 x $189.20 per share today).

So, based on its powerful FCF, FFIV stock is attractive to value buyers. One way for existing investors to play this is to short out-of-the-money (OTM) put options in nearby expiry periods.

Shorting OTM Puts

Shareholders in FFIV stock can generate income (the stock does not pay a dividend) by selling OTM puts. For example, the Feb. 16 expiration puts at the $180 strike price trade for 70 cents on the bid side.

FFIV Puts expiring Feb. 16 - Barchart - As of Jan. 30, 2023

That implies that a short seller of those puts, which are 5% out-of-the-money (OTM), can generate an immediate yield of 0.39%. This is the result of receiving $70 for every 1 put contract shorted after securing $18,000 in cash and/or margin with the investor's brokerage firm.

That may not seem like much, but consider that there are only 17 days until this option expires. So, this play can be repeated. For example, if the same yield is available every 3 weeks and it is repeated for a quarter (i.e., 12 / 3 weeks = 4x), this means that over the next 90 days, the investor makes an income of $280 for the $18,000 invested.

That produces 1.55% in income in just 12 weeks. That also helps provide good downside protection of $2.80 over the next quarter, or about 1.5% compared to today's stock price.

In other words, long-term value buyers in FFIV stock can expect to see a higher price. In the medium term they can create income shorting OTM puts in nearby expiration periods.

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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.