Riverbed Technology Is Still a Rule Breaker

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Cloud computing is still The Next Big Thing. How do I know? Customers can't stop buying Riverbed Technology's (Nasdaq: RVBD  ) deduplication appliances.

Not sure what deduplication means? Think of it as packing a suitcase with only the essentials. In a similar fashion, Riverbed's Steelhead products combine hardware and software that strip needless 1s and 0s from data packets as they travel over a network. Lighter data moves faster.

Customers still like that pitch. Product revenue ballooned 50% in the first quarter while total revenue soared 45%. Gross margin improved a percentage point year-over-year, to 76.2%, and returns on capital more than doubled over the same period.

Overall, Riverbed reported $163.6 million in Q1 revenue and $0.20 in per-share earnings. Both results beat expectations, which analysts revised last week to $0.19 per-share profit on $161.9 million in revenue.

You'd think that would be enough to lift the stock during today's bullish action. Not so. Shares of Riverbed are down more than 2% even as peers Cisco (Nasdaq: CSCO  ) and F5 Networks (Nasdaq: FFIV  ) rally.

Guidance may be the issue. In last night's conference call with analysts, Chief Financial Officer Randy Gottfried told investors to expect $171 million to $173 million in second quarter revenue and $0.21 in adjusted per share, about in line with what Wall Street was already expecting. Investors were apparently hoping for better. Dumb.

All signs point to Riverbed filling a massive need (i.e., faster data delivery over private and public networks) at a very attractive price point. In this sense, today's sellers are focusing on the trunks of the Redwoods in a Very Big Forest. Buy before they look up to see what they're missing.

Do you agree? Disagree? Tell us what you think about Riverbed's results, valuation, and competitive positioning using the comments box below. You can also rate Riverbed Technology in Motley Fool CAPS.

The Motley Fool recently introduced a free My Watchlist feature that allows users to stay ahead of the curve and receive up to date news on companies like Riverbed Technology, or any of its competitors. To get up-to-date company news and analysis, add Riverbed to your watchlist today.

Riverbed Technology is a Motley Fool Rule Breakers recommendation. Alpha Newsletter Account LLC owns shares of Cisco Systems. 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 didn't own shares in any of the companies mentioned in this article 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 created a bull call spread position in Cisco and is also on Twitter as @TheMotleyFool. Its disclosure policy is practicing its yoga today. Deep breaths ...

Read/Post Comments (2) | Recommend This Article (1)

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 April 20, 2011, at 4:18 PM, joaquingrech wrote:

    I like the company but i'm having trouble with valuation at 155 p/e and even if analysts are right and makes $1 at end of year, that will still put it on about 30 p/e

    Basically it seems fairly priced even if it achieves targets. Unless it gets a $2 earnings for 2012, there is not much upside, plus you risk a miss and collapse at those valuations.

    Just not for the faint of heart.

  • Report this Comment On April 21, 2011, at 11:26 PM, techlvr11 wrote:

    Cloud companies have very high PE with vmw, FFIV and Ctxs as other examples. However these companies have so far beat market expectations and are growing at break neck speed.

    155 is still very high PE but seems like rvbd's earnings are justifying that ratio.

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