After F5 Reports, Misery And Suffering Rule The Day For Networking Stocks

If there is any sector of the economy or any group of stocks in other words currently in the house of pain, it's got to be the networking group. F5 Networks came out this morning with reasonable revenues, however warned about the foreseeable weakness from Europe and the U.S. Occasionally, we get a glimpse that something good might be happening at one of these companies. First it was FFIV, at that time Juniper Networks, at once Acme Packet, yet whatever good was going on quickly dissipated.

The bottom line here is that the overall networking pie has been shrinking. These companies are constantly leapfrogging each other technologically. So, though the sector is shrinking, a newer, better product will be introduced and one of the networking stocks will go up. The cycle goes unceasingly, with first one company doing then, at that time another. However no matter which company is on top, shareholders continually get left in the dust.

Few reasons why this continues to happen

There are a few reasons why this continues to happen. Let's start with the largest clients of the networking products, the big international banks. They need speed and security, however they are suffering and have been for quite some time.

Move on to the European clients, exactly Riverbed Technologies. This company has been growing for the past 8 years. Nevertheless, the March 31 2012 10Q shows that revenue from Europe grew from 2011 to 2012. More importantly, revenue from Europe grew as a percentage of total revenue from 24% in 2011 up to 28% in 2012. This was the most significant growth area of the company. Other geographies shrank. It seems unlikely given the current problems in Europe that Riverbed can continue to grow that geography and along these lines growth for the company may stagnate. The industry's bellwether, Cisco Systems said in its last 10Q, "lower gross margins in the Americas and EMEA [Europe, Mid-East, Africa] segments."

How about the emerging market clients?

How about the emerging market clients? The economies of China, India, and Brazil all continue to slow. As so many of the world's economies are slowing down, it's no wonder the networking pie is shrinking.

Another headwind facing these networking stocks is the Cloud, which offers scalable computing services where big clients pay for only specifically what they use. Amazon says, "Amazon EC2 changes the economics of computing by allowing you to pay only for capacity that you as a matter of fact use." No more wasted compute time and space. No more server farms maintained by each and every company, which equals less capital expenditure on computing hardware and networking products.

Can these stocks bottom before long? Like as not. America is recovering slowly, however as America speeds up and as the U.S. banks get back to profitability, the networkers may begin to see an increase in business once again.

So, it's not that you picked the wrong networking stock for your portfolio. Avoid these stocks and avoid the pain and misery for a during, however never count them out. They won't be down forever. Meanwhile, AMZN, Verizon, Google, and AT&T all look like good alternatives.

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