One analyst is scrutinizing a few companies in the telecom field. As this industry continues to move and grow, Merrill Lynch is making the call early before any of these companies really takes off. The three companies that Merrill Lynch is putting under the microscope are Aerohive Networks Inc. (NYSE: HIVE), F5 Networks Inc. (NASDAQ: FFIV) and Gigamon Inc. (NYSE: GIMO).

24/7 Wall St. has included recent movements by each stock, as well as the range and consensus price target.

Aerohive Networks

Aerohive Networks had its estimates increased as well as its price objective. The brokerage firm explained in its report:

The reselling agreement with Apple is another opportunity for the company, where Apple could help Aerohive get into college campuses and lower education next year. The stock has traded up 84% from the February lows, in anticipation of the E-rate opportunity, yet the valuation is still below the peer group, and further upside to the stock will likely be driven by upside to Street expectations for 2H15. M&A activity in the space, HP/Aruba and Fortinet/Meru, remains another supporting driver for one of the only pure plays remaining in the space. Overall, Aerohive’s valuation remains attractive, trading at ~1.4x our FY16 EV/Sales. We are increasing our EPS estimates for 2015/2016 from -64c/-9c to -59c/-5c.

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As a result, the brokerage firm maintains its Buy rating for Aerohive Networks with a price objective of $8, up from $7. Despite this solid rating, the company does face some risks:

• The investment in wireless LAN can be discretionary and therefore lumpy over time.
• The enterprise wireless LAN market is highly competitive and faces the risk of commoditization.
• Larger competitors, like Aruba and Cisco, have started offering controller-less products and cloud management offerings.
• Aerohive recently began selling new offerings, such as its new access switch, to compete with a variety of incumbent vendors’ offerings, which adds execution risks.

Shares of Aerohive Networks were up 0.6% at $7.15 on Friday. The stock has a consensus analyst price target of $6.97 and a 52-week trading range of $3.43 to $10.34.
F5 Networks

Merrill Lynch sees near-term strength for F5 Networks in particular. The reasoning behind this is share repurchases and strong cash flow generation driven by deferred revenue. The brokerage firm stated:

Deferred revenue growth accelerated to 23% YoY in F2Q15, above the previous eight quarter average of 19%. We balance these strengths with expected continued deceleration in both product and service revenues — which should lead to slower deferred revenue growth over the next couple of quarters — and increasing competition in both the hardware-based and virtual ADC space.

Merrill Lynch maintained a Neutral rating but increased its price objective for F5 Networks to $132 from $126. Risks to the price objective include: slower growth rates, aging product cycle, increased competition, inability to sustain service revenue growth and a slower traction of new products.

Shares of F5 Networks were down 0.2% at $126.53, in a 52-week trading range of $106.57 to $136.11. The stock has a consensus analyst price target of $130.97.

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Gigamon

Gigamon reported three straight quarters of improved sales and profit trends, with renewed momentum driven by three factors:

• Better sales and management execution
• Growing product portfolio (14+ add-on applications)
• The company’s pivot into security, which is generating more sustainable demand and broadens the addressable market

These, coupled with easy comps in the upcoming quarters, could drive further upside in the company’s revenue. However Merrill Lynch maintains a Neutral rating but increases its price objective to $35 from $30. The firm lists the risks associated with its price objective:

Upside risks to our PO are: (1) strong execution in driving growth from international expansion (2) faster than expected incremental expansion into existing and new customers (3) stronger than expected adoption outside of Fortune 100 companies (4) improved sales productivity and (5) stronger/sooner than expected earnings leverage.

Downside risks are (1) competition from existing packet broker vendors and from new switch vendors (2) adoption of alternative technologies such as Software Defined Networking (SDN) (3) pricing pressure from commodity solution suppliers (4) tool vendors integrating similar traffic visibility type of functionality and/or being more price competitive and (5) tightening of IT budgets.

Gigamon shares were up 0.6% at $30.87. The stock has a consensus analyst price target of $31.33 and a 52-week trading range of $9.95 to $32.58.

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