Will Riverbed Ever Find Bottom?

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Shares of Riverbed Technology (NASDAQ: RVBD  ) are still struggling to find their footing ever since the company's fourth quarter earnings report sent the stock tumbling down 22%. I felt the level of punishment was an exaggerated reaction by investors, especially since Riverbed's earnings arrived broadly in line with expectations. The Street, however, felt differently. Since then the stock has tumbled another 8% to a recent low of $14.82, and I'm wondering will this stock ever find a floor.

Are there reasons to be fearful?
Granted, that's a very general question. And I'm sure there's always a reason to be fearful in every investment. In this sector, carrier spending is a big concern. But Riverbed has done as well as it can from what has been a brutal spending environment, which has also affected F5 Networks (NASDAQ: FFIV  ) and Juniper.

However, somewhere along the way, it seems Riverbed's management has lost the Street's confidence. And judging by the stock's movement lately, so have investors. But can management regain faith that the company can navigate out of what has been a weak wide area network -- or WAN -- optimization business? But the numbers tell a different story. Despite the recent slowdown, Riverbed was still able to secure 52% market share, surpassing rivals like Cisco (NASDAQ: CSCO  ) .

Cisco's recent attacks on the Riverbed's WAN business are cause for concern, however. Cisco continues to spend aggressively in that area. These include paying $141 million in cash for Cariden, followed by $1.2 billion for Meraki and then Cisco picked off BroadHop to leverage its enterprise mobile position. While Riverbed enjoys a 52% share today in WAN optimization, the net effect of these recent acquisitions by Cisco might eat into that lead. To that end, Riverbed's management guided very cautiously. And it was at that point that investors got spooked.

Can OPNET revitalize growth?
Despite what the stock has done recently, growth has not been a problem for Riverbed. After all, the company posted a 17% year-over-year increase in revenue, which also advanced 9% sequentially. That's all well and good. But it speaks to the present, while saying very little about where the company is going. The Street understood this. Astute investors also appreciate that this performance was prior to Cisco's recent acquisitions.

Similarly, investors are hoping that Riverbed's $1 billion acquisition of OPNET eventually pays off. So far, however, the scenario has not been favorable. In fact, in the recent quarter it actually hurt Riverbed's core business, causing a miss in operating margin, which arrived at 27%. But excluding the OPNET acquisition, Riverbed's operating margin was actually 1% higher. But it can't be all-bad forever. I didn't care for the timing of the acquisition. But it was one that Riverbed had to make. 

It's hard to not be impressed by OPNET's application management business, which is growing at a rate of 30%. And when you consider that it accounts for 60% of OPNET's revenue, it's a very attractive asset. Plus, this will now help Riverbed fight off Cisco, while having a business to offset sluggishness in WAN optimization. But Cisco and F5 are not going to make it easy. F5 has been making moves of its own to solidify its market position by picking off LineRate Systems, a developer of software defined networking services.

What's more, the company also announced the F5 Mobile App Manager, a new hybrid cloud solution for mobile application management. As with Cisco, both of these moves should allow F5 to better compete with Riverbed. The good news for Riverbed, though, is the current weakness in WAN might be temporary. And these rivals may be fighting for a bigger pie. According to research firm Gartner, roughly 80% of end-user traffic will be in WAN by 2014. Essentially, all Riverbed has to do is hold on to its lead. That's easier said than done. But OPNET's strong 30% growth should serve as a good catalyst.

What of the stock?
As often is the case in the tech sector, valuation is predicated on top-line growth and cash flow growth. While the top line has been OK for Riverbed, cash flow has suffered, including a 12.44% decline in the fourth quarter. And, despite the decent revenue growth, the company has posted a decline in earnings per share. So it's tough to target where the stock is heading from this point forward.

Consequently, shares may now be in a holding pattern until Riverbed shows clear signs of progress. And this is a situation where an investor with an appetite for risk can profit. While there are some causes for concern, there is an equal amount to be optimistic about. And the bottom for this stock may hinge on whichever news surfaces last.

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