Why Barracuda Networks Inc. Jumped 12.7% on Friday

Investors are coming back from a severely overcooked negative reaction, helped along by a sane buyback move.

Anders Bylund
Anders Bylund
Oct 2, 2015 at 5:19PM
Technology and Telecom

Source: Barracuda Networks.

What: Shares of Barracuda Networks (NYSE:CUDA) closed 12.7% higher on Friday, taking some of the sting out of Wednesday's drastic plunge. All told, the stock still trades 29.5% lower for the week.

So what: On Wednesday, Barracuda's stock crashed hard due to a mixed second-quarter report with a side of disappointing forward guidance. At the time, I said that the market reaction seemed overdone, and that the company actually looked like a solid long-term business.

Thursday night, management announced a $50 million share buyback policy. Friday morning, analyst firm Imperial Capital reiterated its "buy" rating on the stock, albeit with a reduced target price. Taken together, these two actions started to lift Barracuda's shares again.

Now what: The $50 million buyback authorization represents 6% of Barracuda's current market value or 51% of the company's trailing free cash flows. It's a big bet, and a strong signal of management's confidence. Buybacks only make sense when shares are cheap, and make you look ridiculous if the light at the end of the tunnel turns out to be an approaching freight train.

So Barracuda's leadership believes that the stock will see better days, and plans to take some positive action while shares are unreasonably cheap. 

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Imperial Capital's research note largely underscores my own analysis on the stock. Sales are sliding into future quarters but not disappearing altogether. There's clearly work to be done, improving Barracuda's sales execution, but the company is far from broken. Again, note that the buyback can be funded by positive cash flows and that sales are showing a healthy growth trend.

In short, this was an expected bounce fueled by investors taking a sober look at the cloud-based security and storage expert's real-world business performance. The analyst note and buyback plan only accelerated the return to sanity a bit.