Welcome to Week 16 of the Big Idea Portfolio. Mr. Market reclaimed nearly 8 percentage points in this three-year contest thanks big drops in the shares of Apple (Nasdaq: AAPL ) and Riverbed Technology (Nasdaq: RVBD ) . Details on these companies and more in a minute. First, let's dig into the numbers.
|S&P 500 SPDR||$127.15**||$137.95||8.49%|
Source: Yahoo! Finance.
* Tracking began at market close on Jan. 6, 2012.
** Adjusted for dividends and other returns of capital.
Like passengers on the sinking Titanic, analysts abandoned Riverbed after the company reported disappointing first-quarter results and projected a light Q2. Seven downgraded the stock, though RBC Capital Markets made the strongest call by cutting its rating from "outperform" to "underperform." The stock declined nearly 29% on Friday as a result. Ouch.
But is the beating deserved? That's a different and more difficult question to answer. Foolish colleague Evan Niu takes a shot here and makes some good points. Riverbed is still far and away the market leader in WAN optimization technology. The company's "deduplication" algorithms for stripping away excess in transmitting data over a geographically distributed network have proved their value for years, and its Steelhead product line has earned raving fans as a result.
Trouble is, this stock story is no longer just about Steelhead. CEO Jerry Kennelly and his team understand that WAN optimization is just one of a number of tricks customers are using to upgrade networks for the rising traffic common to the cloud computing era. From the earnings conference call:
We believe our decision to become a multiproduct company with the ability to deliver the broadest portfolio of performance solutions that provide anywhere any-application optimization is the right strategy for our long-term growth. While it won't happen overnight, we are confident in our ability to navigate this transition and achieve our long-standing goals to be a multibillion-dollar company.
Translation: Riverbed is taking the fight from rival suppliers of WAN optimization technology, such as Blue Coat Systems (Nasdaq: BCSI ) , to integrated peer Cisco Systems.
Newer products for monitoring (i.e., Cascade), high performance at the edge of extended networks (i.e., Granite), faster, more efficient storage over great distances (i.e., Whitewater), and smarter distribution of network data traffic (i.e., Stingray) are designed to work in concert, addressing the sorts of broad network challenges that have typically been Cisco's domain.
In much the same way that F5 Networks has successfully branched out from load balancing, Riverbed is in the early stages of branching out from WAN optimization. A successful transition would bring billions in new revenue. I still believe that's possible.
And what of Apple? A federal antitrust suit over e-book pricing appears to have taken a toll, but the bigger catalysts may be troubling reports from Qualcomm (Nasdaq: QCOM ) and Verizon (NYSE: VZ ) . To recap, Qualcomm told investors to expect surprisingly tepid third-quarter results. Big Red said iPhone activations fell 25% in the first quarter. The implication: iPhone sales will disappoint when the Mac maker reports results on Tuesday. I'll believe that when I see it.
The week that was
Stocks ended mixed last week, with the Dow up nicely at 1.40% while the S&P 500 gained 0.60%. Small caps also rallied, as the Russell 2000 closed up 0.96%. Among the major indexes, only the Nasdaq Composite fell 0.36% as big tech names put up little numbers. Even so, the tech-heavy index still leads all others with a 15.17% gain year to date. Investors also seem to think the sell-off represents a buying opportunity: The CBOE Volatility Index, or "VIX," widely regarded as the best measure of fear in the market, fell more than 10%.
See you back here next weekend for more tech-stock talk. And remember to check out the Fool's latest special report -- "5 Stocks Investors Need to Watch This Earnings Season" -- and add the Big Idea portfolio stocks to your Foolish Watchlist for ongoing, up-to-the-minute coverage. Both the report and the Watchlist are 100% free to use:
- Add Apple to My Watchlist.
- Add Google to My Watchlist.
- Add Rackspace Hosting to My Watchlist.
- Add Riverbed Technology to My Watchlist.
- Add salesforce.com to My Watchlist.