Foolish Forecast: Blue Coat's No Turncoat

Web accelerator and security specialist Blue Coat Systems (Nasdaq: BCSI) will report first-quarter financial results tomorrow. Let's speed things up to see whether it deserves our investment dollars.

What analysts say:

• Buy, sell, or waffle? Of the seven analysts covering Blue Coat, six of them seem secure in its prospects and rate it a buy, while one says hold.
• Revenues. Sales are indeed expected to accelerate, rising 61% to $58.8 million.
• Earnings. Profits are expected to grow 66%, to $0.35 per share.

What management says:
Following a few stumbles last year, when Blue Coat started to bleed red, the security appliance developer has increasingly focused on wide-area networking (WAN) markets, and it's seen a number of successful initiatives that are leading to growing revenues. It has also partnered with companies including Symantec (Nasdaq: SYMC) and McAfee (NYSE: MFE) to offer antivirus technology, and with Websense (Nasdaq: WBSN) to offer content filtering. As Blue Coat likes to say, its proxy gateways police traffic so as to "keep 'good' employees from doing 'bad' things on the Internet."

What management does:
To do that, Blue Coat has been focusing on WAN optimization and web acceleration combinations, but it's becoming a more crowded field. F5 (Nasdaq: FFIV), Riverbed (Nasdaq: RVBD), and others are increasingly shifting their attention to WANs as well. Blue Coat has been investing heavily in the wide-area data-services arena, which has cut into margin; having established itself there, however, things may begin to improve.

One Fool says:
Perhaps it's the potential inherent in the systems being developed, but the industry players all sport rich valuations. Blue Coat is no different, and its stock trades near its highest levels, seemingly pricing the company for perfection. While it has seem greater acceptance of its products and experienced strong levels of renewals -- contributing to that ramped-up revenue growth -- an earnings miss could cause its stock to stumble. Considering that analysts have been forecasting a softening in IT spending, it may be difficult for Blue Coat to maintain its aggressive revenue-growth assumptions.

Blue Coat looks like a good stock to place on one's watch list, but at these levels, it might be a bit pricey to dive in.

Related Foolishness:

• Blue Coat Bleeds Red
• Blue Coat Is All Wet

Blue Coat has earned a four-star rating from the 60,000-strong investor intelligence community at Motley Fool CAPS. You can add your voice to the stock rating service by joining today. It's free!

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Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.