Why Did These 2 Stocks Fall Apart?

So far this month, strong earnings continued to undergird a sense of improvement in stocks, despite ominous signs out of Europe. But with the companies below going down hard last week, first let's see whether they had good reason to drop. Sometimes, panic-fueled declines can make excellent buying opportunities.

You've made your bed, now lie on it
When it comes to lowering earnings guidance, the markets prefer you not be so exact. Last quarter, Riverbed Technologies (Nasdaq: RVBD  ) estimated first-quarter sales would fall 8% to 10% from the fourth-quarter efforts. Right on cue, they came in 9.8% lower and the stock was in full retreat, losing more than 28% of its value on Friday.

Management gave the excuse that the company's in the midst of a product transition period so the uptake was slow. True enough, oftentimes there's resistance to upgrading to new product introductions if the old ones look good, but last quarter CEO Jerry Kennelly said, "We believe we are in the strongest strategic and competitive position in our history. Adding to that, early in 2012 we will be entering what we believe will be Riverbed's most exciting and important product cycle yet."

Competition seems to be the key here. Cisco (Nasdaq: CSCO  ) remains the biggest stumbling block to gaining real traction. The timing seems unfortunate, as with the WAN optimization market slowing and Riverbed introducing a bunch of new products that will cause potential customers to hesitate to move, Cisco has become a stronger rival. It was a similar situation at Juniper Networks, where Cisco has been taking share again in the router market.

With that said, though, Riverbed's not down for the count. For too long, Cisco ceded some of the biggest growth markets to its smaller rivals like Riverbed and F5 Networks, and they grabbed at those brass rings, gaining considerable share there -- with F5 posting better-than-expected results in its earnings report. That Cisco has recognized the problem and is moving to correct it is one thing, but Riverbed's technological excellence still gives it an edge. Although this year is not shaping up so well right now, 2013 could be when those new products boost the company's position again.

Investors remain supportive, even if they beat feet after the earnings announcement. Over on CAPS investors back its transition by a wide margin, with 94% of the nearly 1,000 members rating the networking specialist picking it to outperform the market over the long run. But one of the All-Stars there, TSIF, said ahead of earnings that it was a pricey stock: "At 6X book, 60-80 P/E, and with low margins it's hard to see what the speculators are buying into." Even after the beating, things haven't changed all that much.

If you agree that its nosebleed valuation is too high, add Riverbed to your watchlist, then tell us on the Riverbed Technologies CAPS page what would be a better entry point.

A call to order
The quixotic campaign that one-time computer memory leader Rambus (Nasdaq: RMBS  ) is on is not doing it or its shareholders any good, yet the company really seems to have no other alternatives but to soldier on and fight every last battle.

While it's filing appeals from the drubbing it took in court with its case against Micron (Nasdaq: MU  ) and Hynix Semiconductor, Rambus' remaining business doesn't look healthy. While revenues were up marginally compared to last year, they were down sharply from the fourth quarter as it had received a royalty payment from Broadcom. It may have gotten some new business from NVIDIA (Nasdaq: NVDA  ) and MediaTek, but it's at a lower licensing rate then it's used to getting.

Additionally, one of its top customers, Japanese chip shop Elpida, went bankrupt, so the royalty income it receives from them will be reduced as well.

An investment in Rambus is one that's going to require reduced expectations. Where the agreements with NVIDIA and MediaTek show that there is still value in what Rambus has to offer, it's just not going to garner the same premiums as it did in the past. And if it weren't for the legal expenses that continue to eat away at the company, one could tolerate like Sancho Panza the tilting at windmills it performs in the courts.

Rambus has lost at just about every turn, and it should accept that fact and go back to rebuild what remains of its business. It may not be as glorious as it once was, but there's still significant value there -- if it can only let go of the past.

The Fool's Anders Bylund, who goes by TMFZahrim on CAPS, notes the long, dreary path Rambus has been walking:

Rambus settles a few claims, loses the rest, and goes home somewhat richer but none the nobler. The prospects for another successful lawsuit are fading fast, which is why I'm starting a bearish CAPScall on Rambus even at these five-year lows (if you ignore occasional even-deeper plunges along the way). It's still a long way to the bottom.

But tell me in the comments section below or on the Rambus CAPS page if you think there's a reason not to let go of the legal battles, then add the stock to the Fool's free portfolio tracker to be alerted of the next lawsuit it files.

Ready for a resurrection
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Fool contributor Rich Duprey owns shares of Cisco Systems, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Cisco Systems and Riverbed Technology. Motley Fool newsletter services have recommended buying shares of NVIDIA and Riverbed Technology, as well as writing covered calls on Riverbed Technology and writing puts on NVIDIA. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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