Riverbed: An Undervalued Growth Stock

| About: Riverbed Technology, (RVBD)

Riverbed Technology, Inc. (NASDAQ:RVBD) produces technology that makes networks run better. The firm's products allow IT managers to tweak network attributes until a more preferred network performance is attained. Thus, Riverbed plays an important role in today's network-connected world.

While the firm does face competitive pressure from the likes of Cisco (NASDAQ:CSCO) and Microsoft (NASDAQ:MSFT), Riverbed's financial performance speaks for itself. The firm has grown at a double digit annual pace every year since at least 2009. That strong performance has not translated into the outperformance of the share price, which means there is potential for Riverbed to start to outperform the market.

Further, based on every multiplier model valuation method I used, Riverbed is undervalued; that suggests Riverbed could outperform. The company is a growth company that is undervalued. I put the intrinsic value at $32.59, which suggests 97% upside. I put the downside at 20% with a trailing stop loss. Management believes the stock is undervalued.


  • Riverbed is engaged in a patent dispute with Silver Peak Systems. Potential liability stemming from the litigation is indeterminable.
  • Sales to government organizations represented a significant portion of overall sales.
  • In the WAN Optimization market, Riverbed faces competition from Cisco Systems, Blue Coat Systems (NASDAQ:BCSI), Citrix Systems (NASDAQ:CTXS), and F5 Networks (NASDAQ:FFIV).
  • In the Network Performance Management and Application Performance Management markets, Riverbed competes with Netscout (NASDAQ:NTCT), Computer Associates, and Compuware (NASDAQ:CPWR).
  • Microsoft has improved the performance of its software for remote office users. Riverbed's products are designed to improve the performance of many applications, including applications that are based on Microsoft protocols. Improvements to Microsoft application protocols may reduce the need for Riverbed's products.
  • Improvement in other application protocols or in the Transmission Control Protocol [TCP], the underlying transport protocol for most WAN traffic, could adversely impact results of operations.
  • If Riverbed is unable to protect its intellectual property rights, its competitive position could be harmed.
  • Cisco Systems incorporates WAN optimization functionality into certain of its router blades.

Recent Developments

  • Riverbed increased its share repurchase program to $500 million. The company may be lacking investment opportunities; or, management may believe the stock is undervalued.
  • Riverbed announced that it has extended its market leading Steelhead wide area network ("WAN") optimization product family with the addition of a new hardware appliance and upgrades to its Steelhead software. Steelhead WAN optimization solutions can now accelerate a broader range of enterprise infrastructures while expanding IT control and ease of management, including smaller branch offices, cloud infrastructures, SAAS applications, and locations served by hybrid networks.
  • Riverbed introduced a new release of its groundbreaking Riverbed Granite product family that delivers an enterprise-class solution for server and data consolidation. With expanded capacity and higher performance, IT managers can now extend the benefits of Granite to larger branch offices and data-intensive applications that previously were difficult or impossible to consolidate.

Business Profile

Riverbed Technology, Inc. was founded on May 23, 2002 and has developed innovative and comprehensive solutions to the fundamental problems associated with IT performance across wide area networks ("WANs"). The company's portfolio of IT performance products enables customers to simply and efficiently improve the performance of their applications and access to their data over WANs, and provides global application performance, reporting and analytics, application delivery control and cloud storage.

On December 18, 2012, Riverbed completed the acquisition of OPNET Technologies, Inc. (OTCQB:OPNT). The addition of OPNET's broad-based family of Application Performance Management ("APM") products enhances Riverbed's position in the Network Performance Management ("NPM") market and enables Riverbed to provide customers with an integrated solution that both monitors network and application performance and also accelerates it.

Riverbed has two product lines: Application Acceleration and Performance Management. Application Acceleration includes the Steelhead Product Family (WAN Optimization), Granite Product Family (Storage Delivery), Stingray Product Family (Application Delivery Control) and Whitewater Product Family (Cloud Storage Delivery). Performance Management includes APM (formerly OPNET products) and NPM products (formerly the Cascade product family).

Financial Performance Forecast

The acquisition of OPNET contributed a substantial amount of the revenue growth in fiscal 2013.

As of June 30, 2013, Riverbed's products have been sold to over 23,000 customers, compared to over 19,000 customers as of June 30, 2012.

Riverbed should cross the $1 billion of annual revenue mark in fiscal 2013; I'm forecasting revenue in the $1.07 billion to $1.1 billion range, a 28% to 32% increase relative to fiscal 2012. For this fiscal year, the operating margin should be between -3% and -5% and the net profit margin should be between -4% and -6%.

I think revenue will grow 10% to 20% in fiscal 2014; revenue should increase to the $1.18 billion to $1.32 billion range. The company should return to profitability with a 10% to 13% operating margin and a 6% to 9% net profit margin.

Riverbed had about $870 million of contractual obligations outstanding as of June 30, 2013; but, the company had $518.8 million of unrestricted cash and cash equivalents. Overall, the financial position is solid.

Also, the company is becoming more efficient in the utilization of its assets. Finally, as the scale of the company increases, I think management can generate a return on equity above the cost of equity.


I'm going to use the multiplier models to value the common equity shares of Riverbed. I'll use the 5-year average valuations to determine the intrinsic value.

The current share price is $16.54. On an absolute basis, the company is cheap considering its growth rate. On a time-series basis, the company is cheap. The price/book ratio implies an intrinsic value of $27.74; the price/sales ratio suggests an intrinsic value of $30.72. And, the price/cash flow ratio suggests an intrinsic value of $39.32. My intrisic value of the common equity shares of Riverbed is $32.59.

At the current share price, Riverbed is 97% undervalued. Thus, I am bullish on the common equity shares of Riverbed.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.