Why Are You Selling Riverbed Technology?

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Shares of Riverbed Technology (Nasdaq: RVBD  ) are down 30% since the company's July 19 earnings report. Bears growl as bulls shirk. This tech titan is tanking.

Or is it? For the most part, Riverbed delivered in Q2:

  • Product revenue once more grew faster than overall revenue, up 38% versus 35%. That's good news. Box sales continue to drive this growth story.
  • Both gross margin (up 70 basis points) and returns on capital (up to 8.5% from 6.9%) showed noticeable improvement year over year in Q2, which suggests both pricing power and smart use of capital resources.
  • While cash from operations declined, the key detractors were higher prepaid expenses and a sharp decrease in the company's net benefit from stock-based compensation. Again, these just strike me as good management choices that mean nothing to long-term shareholders. Investors will eventually enjoy higher cash flows resulting from growing demand for Riverbed's Steelhead line of WAN Optimization products, which add speed by eliminating redundancies and unnecessary steps in delivering data.

More than anything else, Riverbed fell because revenue came in short of management's own expectations. CEO and co-founder Jerry Kennelly could have shifted the blame to a lousy economy. Instead, he admitted that -- in Europe in particular -- the sales team could have executed better.

Color me thrilled. Frankness bespeaks courage. In this sense, Kennelly isn't afraid to admit a mistake because, as a co-founder, he's personally invested in fixing it. This same dynamic explains why no one can tell from Apple's (Nasdaq: AAPL  ) earnings that Steve Jobs is on medical leave. It's also why Reed Hastings personally responds to Netflix (Nasdaq: NFLX  ) critics. Owners take good returns, and good management, personally.

In sum, nothing in Riverbed's report or management's comments leaves me concerned. Sure, Cisco (Nasdaq: CSCO  ) is a tough competitor and will do its best to beat Riverbed, but Juniper Networks (Nasdaq: JNPR  ) is struggling, and Akamai Technologies (Nasdaq: AKAM  ) is a partner for accelerating apps as they travel from inside a company network across the cloud. All signs point to a large and growing need for the sort of WAN optimization Riverbed provides.

Now it's your turn to weigh in. Does this sell-off reflect a disruptive shift, or a buying opportunity? Please vote in the poll below, then leave a comment to tell us your thoughts about Riverbed's business. You can also add Riverbed Technology to your watchlist for up-to-date analysis on the stock as soon as it's published.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Akamai and Apple at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Apple. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Riverbed Technology, Netflix, Akamai Technologies, Cisco Systems, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended buying puts in Netflix. Motley Fool newsletter services have recommended shorting Juniper Networks. Try any of our Foolish newsletter services free for 30 days. 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 disclosure policy.


Read/Post Comments (8) | Recommend This Article (5)

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 July 29, 2011, at 3:06 PM, jimmy4040 wrote:

    The evidence would suggest that is some sort of loosely organized shorting campaign around Rule Breakers over the last six months or so. It would explain both the chaotic rise of such stocks as SODA and MAKO as a short squeeze and the unprecedented 20-30% or more drop of such picks as ENOC, PACB, CCSC, RVBD, IMAX, SSYS, EBIX, and VPRT in a very short period.

    Not normally a consipracy guy, but these numbers are hard to explain.

  • Report this Comment On July 29, 2011, at 3:07 PM, liberry22 wrote:

    p/e is 100 52 week low is 15 and insiders are selling

    get a clue

  • Report this Comment On July 29, 2011, at 3:33 PM, Atlanta25 wrote:

    Question: Why is Riverbed's P/E around 100? Trailing twelve-month earnings are $.77 (according to Yahoo Finance). Thus, the P/E should be 28.71/.77=37.28.

  • Report this Comment On July 30, 2011, at 3:56 PM, mwlove wrote:

    Riverbed has a great product. Their stuff increases productivity and saves companies money. It's bed of breed, without a doubt. Yes, the P/E is high, but this company will rule the roost. I'm buying more.

  • Report this Comment On August 02, 2011, at 10:33 AM, Borisbmx wrote:

    your point that they did have nice 50% growth in the US market is a very good marker.

  • Report this Comment On August 05, 2011, at 5:14 PM, RATBSTD wrote:

    i agree with jimmy4040!!!

  • Report this Comment On August 05, 2011, at 5:33 PM, Domeyrock wrote:

    did anyone NOT hear or ead the conference call?? Given 24 to 48 hours, they would have met if not BEAT expectations. They didn't even blame the economy! NONE of their competitiors could say that (Cisco, Juniper...) I'd buy this puppy all the way down.

  • Report this Comment On August 05, 2011, at 5:40 PM, Domeyrock wrote:

    PACB beat estimates too if any one wants to pay attention to the conference call. By ohh maybe $5 MILLION or so??! When the market throws you a gift like that do you say "no thank you"? or "yes please!"

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