Should the Alarms Sound at F5 Networks?

NEW YORK (TheStreet) -- On the stock market, there is no shortage of growth stocks that are trading at high multiples. As a value investor, I often worry whether these stocks are worth the risk and can ever grow into their valuation. But also I wonder if investors will ever get the future returns they expect from paying such a premium today.

This has been my chief concern with F5 (FFIV) . I've always wanted to like this stock but I could never collect the nerve to pull the trigger. On the heels of its most recent earnings report, I'm glad that I didn't.

Miss-and-Lower Q4 Very Alarming

For the period ending September, F5 reported net income of $67.7 million, or 85 cents per share on revenue of $362.6 million. Aside from a slightly higher tax rate, profits were somewhat unchanged from the year-ago quarter when the company earned $67.6 million and 84 cents per share. On an adjusted basis and excluding certain items such as stock-based compensation, the company earned $1.12 per share.

While this figure represents a 6% increase year over year, it fell short of analysts' estimates of $1.18 per share on revenue of $366.1 million. Essentially, although F5 grew revenue and EPS by 15% and 6% respectively, the company missed on both its top and bottom lines. Considering how tech companies have fared this year, including rivals such as Cisco (CSCO) , this was not a huge surprise. But Cisco does not carry F5's high expectations either. If I were an investor, alarms would be sounding.

The company is producing product revenue growth in only single digits. Likewise, though F5 showed a slight year-over-year improvement in gross margins, that figure showed a noticeable decline sequentially. Similarly, investors have to wonder if growth of less than 13% in operating income supports paying the premium they would pay for these shares today.

Overall, the numbers were far from horrible. For the fiscal year, F5 earned $275.2 million, or $3.45 per share on revenue of $1.38 billion. While this performance can stand up against any other within the tech sector, the question is, does the stock make sense. With the recurring theme being weakness in IT spending, it doesn't appear as if things will get much better.

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