Why Rally Software Development Corp. Shares Got Crushed

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 cloud-based software specialist Rally Software Development  (NYSE: RALY  ) plummeted 30% today after its quarterly results and outlook disappointed Wall Street.

So what: The stock has been battered in 2014 on concerns over slowing growth, and today's first-quarter results -- loss of $0.34 per share on a top line of $19.43 million -- coupled with downbeat revenue guidance only reinforce those worries. In fact, gross margin during the quarter fell 500 basis points from the year-ago period to 73%, suggesting that Rally's competitive position is becoming increasingly expensive to maintain.

Now what: Management now expects a 2015 non-generally accepted accounting principles loss of $1.31-$1.36 per share on revenue of $87 million-$90 million, versus its previous view of a $1.61-$1.56 per-share loss and revenue of $91.5 million-$93.5 million. "Fiscal year 2015 is an important year for Rally Software and this quarter, while mixed in performance, sets a foundation for executing in the second half of this year," said Chairman and CEO Tim Miller in a press release. Given Rally's cash-rich balance sheet and severely beaten-down shares -- off about 70% from their 52-week high -- now might even be an opportune time to bet on that turnaround talk. 

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