Is Riverbed Technology a Rule Breaker?

It's a week of earnings reports from fast-growing upstarts. Yesterday, VoIP up-and-comer 8x8 (Nasdaq: EGHT  ) took the stage, and I examined whether it was a Rule Breaker-caliber stock. Today, Riverbed Technology (Nasdaq: RVBD  ) gets the spotlight.

We'll dig into the details of its fourth-quarter report in a moment. First, let's cover the basics of the business from a Foolish perspective:

Metric

Riverbed Technology

Operations

The market leader in WAN optimization, an esoteric phrase that generally refers to equipment for making connections between networks run faster and more smoothly.

CAPS stars (out of 5)

***

Total ratings

670

Percent bulls

92.8%

Percent bears

7.2%

Bullish pitches

93 out of 101

Highest rated peers

Digi International, Spirent Communications, Network Engines

Data current as of Jan. 28.

Riverbed's main product is the Steelhead family of appliances, which use a variety of techniques to establish and accelerate connections between networks. I know, that sounds familiar. Trust me when I say Riverbed's technology isn't the same as everything else you've already heard about.

Unlike Akamai (Nasdaq: AKAM  ) , which caches data at points close to users, or F5 Networks (Nasdaq: FFIV  ) , whose load balancers prioritize delivery of network traffic, Riverbed's gear strips away needless 1s and 0s in the data being delivered. Make information lighter, the theory goes, and it'll travel faster.

Customers find that pitch appealing. CEO Jerry Kennelly said during yesterday's earnings call that product revenue soared 52% during Q4, marking the sixth consecutive quarter of accelerating growth in that metric. Big sales to data center customers drove the gains, Kennelly said.

Overall, Riverbed reported a 47% year-over-year increase in revenue and a 73% gain in non-GAAP per-share earnings. Both results beat Street estimates for the quarter, while free cash flow for the full year ballooned 54% to $135 million.

With the stock up more than 4% as I write this, it's obvious investors like the looks of those numbers. Fools, meanwhile, like the stock because chief rival Cisco Systems (Nasdaq: CSCO  ) has yet to find a way to displace Riverbed's stand-alone devices with its own brand of integrated gear.

"Great company that is optimally positioned in a growing industry. Had a great run last year, but its valuation has me believing it still can outperform the market this year," Foolish investor nakawest wrote earlier this month.

I agree. Riverbed may trade for a premium to analysts' long-term growth projections, but they've been low so often that there's probably a lot less of a premium cooked into the valuation than it would seem at first glance. That's why I've rated the stock to outperform in my CAPS portfolio.

Now it's your turn to weigh in. What do you think of Riverbed Technology? Would you buy the stock at current levels? Use the comments section below to let us know what you think. You can also rate Riverbed Technology in Motley Fool CAPS.

Interested in more info on the stocks mentioned in this story? Add Akamai Technologies, Cisco, 8x8, F5 Networks, or Riverbed Technology to your watchlist.

Akamai is a Motley Fool Rule Breakers recommendation. Motley Fool Alpha owns shares of Cisco. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He owned shares of Akamai at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a bull call spread options position in Cisco and is also on Twitter as @TheMotleyFool. The Fool's disclosure policy has never, ever lived in a van down by the river.


Read/Post Comments (1) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On January 28, 2011, at 2:53 PM, ITPurchaser wrote:

    I don't know beans about the stock market, but I've got a lot of experience being the guy who stands in front of the CIO/CEO and tries to justify IT budget requests. Here are two main reasons people like me are buying Riverbed Steelheads left and right:

    1. The product is easy to install, demo, and pilot. Within a few days, I can plug in these devices and actually see results. No need to bother my business customers or even the other IT folks. They don't even know something has changed--just that their apps run faster.

    2. The ROI is easily proven and tangible. It's not just "we're more secure" or "productivity is up"-- squishy concepts that cause a CEO to look at you funny. I show him the telco bills that prove the savings. The performance improvements are just gravy on top of that.

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