I'm Sticking With Riverbed Technology: Here's Why It May Be Time to Buy

Each week, I report the results of the Big Idea Portfolio, a collection of five tech stocks that I believe will crush the market over a three-year period. I've done it before; my last tussle with Mr. Market ended with me beating the index's average return by 13.35%.

Real money was on the line then as it is now, which means any one of the five stocks you see below could cause me a lot of public embarrassment. This time, Riverbed Technology (NASDAQ: RVBD  ) inflicted the most pain, but you wouldn't know it from the scorecard. Riverbed reported disappointing results after the market closed Thursday night, after I had already calculated returns.

I'll pay the price next week: The stock fell 19% in early Friday trading after issuing lighter-than-expected guidance. Co-founder Steve McCanne is also leaving to pursue "important charitable activities at the intersection of medical research and technology," chief executive and co-founder Jerry Kennelly said in a conference call with analysts.

McCanne's leaving no doubt makes investors nervous. Kennelly, for his part, talked up Riverbed's "deep technical bench" that includes ex-members of senior technical teams at Cisco Systems and EMC, among others. "We will miss Steve, but it's more of a sentimental loss than an operational loss," Kennelly said.

A big claim, to be sure, but it resonates when you look at the numbers:

  • Revenue improved 17% to $237.4 million, better than the $234.8 million Wall Street was expecting. Adjusted profits came in even with estimates $0.29 a share.
  • OPNET contributed $6 million in GAAP revenue over 13 days operating as a Riverbed subsidiary. Annualized, that amounts to a $168 million business -- roughly consistent with what we've seen OPNET deliver in years past.
  • Most important, gross margin held firm while deferred revenue (i.e., upfront cash payments for support contracts) soared 56% before accounting for any contributions from OPNET.

Taken together, these figures suggest to me that Riverbed is still early in its growth cycle. Integrating OPNET will take time, of course -- which explains why Q1 guidance came in light -- but the essential elements for sustained growth are here.

What's the Big Idea this week?
Riverbed wasn't my only underperformer. Rackspace Hosting also fell substantially ahead of Tuesday's earnings report. I'm scheduled to speak with CEO Lanham Napier following the news, so look for an update here next week. For now, the Big Idea Portfolio is still struggling to keep pace with the comparable S&P 500 SPDR, which reclaimed 256 basis points since my last check-in.

Not that Mr. Market has been on fire or anything. All four indexes are down for the week as I write this, led by the Dow's 0.47% decline. The Nasdaq fell nearly as much, off 0.44%, while the small-cap Russell 2000 gave back 0.34% and the S&P 500 fell 0.25%, according to data supplied by The Wall Street Journal. Here's a closer look at where I stood through Thursday's close:

Company

Starting Price*

Recent Price

Total Return

Apple (NASDAQ: AAPL  )

$416.26**

$468.22

12.5%

Google

$650.09

$773.95

19.1%

Rackspace Hosting

$41.65

$73.11

75.5%

Riverbed Technology

$25.95

$20.10

(22.5%)

Salesforce.com

$100.93

$170.05

68.5%

AVERAGE RETURN

--

--

30.62%

S&P 500 SPDR

$124.94**

$150.96

20.83%

DIFFERENCE

--

--

9.79%

Source: Yahoo! Finance.
* Tracking began at market close on Jan. 6, 2012.
** Adjusted for dividends and other returns of capital.

Notable newsmakers
Another earnings week brought a mixture of good and weird news:

  • On Tuesday, Oracle (NYSE: ORCL  ) announced plans to acquire beleaguered telecom equipment manufacturer Acme Packet (UNKNOWN: APKT.DL  ) for $2.1 billion in cash, or $29.25 a share. An odd move for Oracle, whose stated "communications" business is light on equipment and software for telecom carriers. Meanwhile, Acme Packet continues to trade above Oracle's stated purchase price. Investors apparently believe a competing bid is in the works.
  • On Thursday, while Riverbed was busy disappointing the Street, LinkedIn (NYSE: LNKD  ) reported revenue and earnings that blew away analyst targets. Profits came in $0.16 ahead of expectations as revenue soared 81% to $304 million. The company's core Talent Solutions business, which helps connect recruiters and companies with candidates, rose 90% year over year. The stock jumped more than 20% on the news.
  • Also on Thursday, Greenlight Capital's David Einhorn sued Apple in hopes of forcing the company to release some of its cash to shareholders via any number of strategies, including issuing preferred shares that pay a 4% dividend.

What caught your eye in the tech world this week? Would you buy any of these stocks? Do you believe Einhorn is right to push Apple to release more of its cash? Please weigh in using the comments box below. And remember: If you're interested in ongoing Apple guidance, The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on whether the stock is a buy. To get instant access to his latest thinking on Apple, simply click here now.


Read/Post Comments (1) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 12, 2013, at 6:25 PM, larcj718 wrote:

    To whom it may concern Counterpath Corporation is the company you should be watching in the tech sector, Oracle might be using Acme Packet as vehicle to bigger and better things, pay attention to the Acme and Counterpaths recent news. Counterpath has been flying under most players in tech radar, this more than a blimp on your screen.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2246460, ~/Articles/ArticleHandler.aspx, 11/27/2014 8:40:54 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement