Why SolarWinds Shares Fell Off a Cliff

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of network management software company SolarWinds (NYSE: SWI  ) fell 23% today after the company reported second-quarter earnings.

So what: The second quarter wasn't terrible, with revenue growing 21% to $77.5 million and net income coming in at $22.8 million. On an adjusted basis the company made $0.40 per share, which was $0.04 ahead of estimates.

The challenge is that revenue fell short of the $78.9 million estimate and guidance was well short of expectations. The company expects revenue of $84.7 million to $87.2 million in the current quarter and earnings of $0.35 to $0.36 per share. Analysts expected $90.5 million in revenue and $0.39 in earnings.  

Now what: The company's licensing revenue growth is slowing, and with shares trading at 31 times trailing earnings, the market has priced in a lot of growth. Slowing growth in its licensing business doesn't support that kind of multiple and analysts rushed to downgrade the stock or lower price targets as a result today. The company isn't in bad shape, but the stock may have gotten ahead of itself, and with its earnings multiple remaining high, I'll avoid the discount today.

Interested in more info on SolarWinds? Add it to your watchlist by clicking here.

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  • Report this Comment On August 01, 2013, at 9:42 PM, PuddinHead42 wrote:

    Expect Gov spending to resume after new Fiscal year starts Oct 1. (I predict a second sequester is not in the cards and they go back to a simple continuing resolution). We use Solarwinds tools and they are top notch and continually improved upon. They have some nice freebies to lure you in too.

    31PE and 21% growth last Q gives PEG of 1.5 - not outrageous for a good growth stock (but it was not "good" this Q)

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