Riverbed Technology (Nasdaq: RVBD), which develops technology for computer networks, was able to launch a stellar IPO yesterday, as the stock price skyrocketed 57% to $15.30. There is certainly good reason for the optimism; simply put, the business is growing at a rapid clip. The problem? The valuation is at nosebleed levels.
Riverbed is the brainchild of Steven McCanne, a Ph.D. in computer science from Berkeley, who wanted to attack the problems organizations face with wide-area networks (WANs). So in May 2002, he co-founded Riverbed and began to put into practice his theories, creating his flagship product, Steelhead.
The result: Steelhead boosts speeds of WANs by 5 to 50 times (and in some cases up to 100 times). This involves a sophisticated technology that helps reduce the transmission of duplicate data, as well as lowers the number of round-trips in data transfers and allows for special techniques to accelerate the speed of certain applications, such as those from Microsoft (Nasdaq: MSFT).
Since its launch in May 2004, the Steelhead product line has seen enormous growth. Revenues were $2.5 million in 2004 and $22.9 million in 2005. And for the first six months of this year, revenues have surged to $31.7 million. In fact, the company already has more than 1,000 customers.
True, the net loss so far for this year is $10.3 million. Then again, this is expected for the early years of a hyper-growth company, as it tries to reach critical mass.
As with any growth market, there is significant competition. Many of the competitors in this space have been bought out by bigger players such as Cisco Systems (Nasdaq: CSCO), which bought Actona Technologies, and Juniper Networks (Nasdaq: JNPR), which purchased Peribit Networks. Although, if you believe Riverbed's prospectus, the company is "currently the only provider of a comprehensive" solution.
What's more, Riverbed's market is still in the early stages, and the addressable market is huge. With about four million offices in the U.S. -- and assuming an average price tag of $5,000 per appliance -- the market has a potential size of $20 billion.
There is also a significant need for a product like Steelhead. More and more, companies are using geographically dispersed teams to work on projects. If you need to send a large file across the U.S., then Steelhead can be a big help.
However, it's usually a good idea to avoid an IPO the first couple of weeks after the offering, since there is usually a lot of hype and excessive trading. And, with a market cap of $989 million, Riverbed is selling at over 9 times revenues (assuming the company posts revenues of $100 million this year, which appears possible). In other words, while this is a solid growth company, it makes sense to wait to get a more realistic valuation.
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Fool contributor Tom Taulli does not own shares of any companies mentioned in this article.
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