The digital transformation of businesses has accelerated dramatically over the past few years.

Currently, application-led companies like Microsoft (MSFT) and Alphabet (GOOGL) make up ~30% of the value of the S&P 500; another 15% are digital differentiators like Tesla (TSLA) and Nvidia (NVDA).

As organizations rapidly adopted cloud-first strategies during the pandemic, their applications and data became more distributed across hybrid infrastructures spanning public clouds, private data centers, and edge locations.

This created new security challenges for companies as they looked to securely connect an increasingly complex network of systems, services, and third-party partners through application programming interfaces (APIs).

At the same time, the threat landscape evolved as well. Sophisticated bot attacks and other malicious traffic targeting cloud-hosted workloads became more common.

To protect their digital operations under these dynamic conditions, enterprises needed full-stack security solutions that could span their hybrid environments and leverage new techniques like artificial intelligence.

The number of apps and APIs continues to multiply. The number currently sits at 1 billion app instances and ~1-2 APIs per app instance, forecasted to increase to 2.3 billion app instances and ~3-5 APIs per app instance by 2027.

F5 (FFIV) has transformed its business strategy and portfolio focus over the past 3 years to capitalize on the secular trends of cloud computing and APIs.

F5 has enhanced its cloud security portfolio to address these evolving needs with new services like API security gateways, bot defense solutions, and tools for monitoring anomalous API behavior.

Its API security capabilities aim to help developers securely manage access to APIs and the data, services, and systems they connect.

On the bot defense front, F5 leverages AI and machine learning models to identify and block malicious bot traffic across public clouds like AWS.

In addition, the company’s hybrid and multi-cloud offerings ensure consistent security policies can be applied regardless of where workloads reside—whether private data centers or leading public clouds.

This is a vital requirement as enterprises adopt flexible “cloud-first” models. F5’s application delivery controllers and web application firewall technologies also integrate these cross-cloud capabilities to progress application protection.

These strategic moves have served the company well with the company achieving 5% revenue growth last year.

The company also managed to increase its operating margin by 540 bps and net income by 50% in the last quarter despite reporting lower revenue due to customer spending cycles.

Furthermore, it also managed to increase total software revenues by 20% and subscription revenues by 28% in the same period.

As organizations increasingly rely on AI-powered security, a company like F5 with AI-enabled apps and cloud defenses is well-positioned.

Going forward, if enterprise technology spending returns, F5’s transformed portfolio focusing on these high-growth domains could see huge upside.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

This portfolio analysis highlights the same insights we share with our FA Alpha Members. To find out more, visit our website.