Riverbed Technology: Dramatic Sell-Off Provides Long Term Investors With Entry Point

| About: Riverbed Technology, (RVBD)

Shares in Riverbed Technology (NASDAQ:RVBD) are the biggest loser on the street on Friday after the company released a disappointing earnings report accompanied by a lower guidance for the remainder of the year. Shares ended the day 29% lower closing just below the $20 mark.

First Quarter Results

Riverbed Technology, the computer network producer who helps customers managing their software efficiently has benefited from the boom in cloud computing. First quarter sales increased 12% to $183 million, below the analyst consensus of $186.1 million. Non-GAAP earnings per share of $0.20 came in line with expectations. GAAP net income fell from $0.08 to $0.04 as the company increased its efforts in sales and marketing and research & development.

"The combination of our product transition and a seasonally weaker quarter was challenging," according to CEO Kennelly. "We continue to feel the unavoidable growing pains associated with becoming a multiproduct company."


As a result of the disappointing first quarter results Riverbed is forced to lower its second quarter and full year outlook.

For the second quarter of 2012 the company expects revenues to come in between $193-$197 million and earnings per share of $0.21-$0.22. Consensus was for the company to report $202 million in revenue on which it would earn $0.24 on a non-GAAP basis.

For the full year of 2012 Riverbed lowers the revenue outlook from an expected 17-20% increase in revenues towards 15%. Analysts at Stifel Nicolaus point out that the product transition is painful in the short term and they expect sales growth to accelerate in the second half of 2012. Still they label the 15% target as ambitious after the recent news flow.


Riverbed ended the first quarter with some $485 million in cash, equivalents and short term investments. The company operates with a mere $25 million in long term debt for a net cash position of roughly $460 million. After Friday's decline the market value has fallen to $3.15 billion which values operating assets at around $2.7 billion. This implies a 3.8 times annual revenue multiple and roughly 42 times 2011's earnings.

Although Riverbed looks anything but cheap on the back of these valuations, the company has seen some very rapid growth in recent years. Furthermore valuations across the cloud-based industry have been propelled higher after some big technology and software companies have announced their ambitions in the field. Hewlett-Packard (NYSE:HPQ), Oracle (NASDAQ:ORCL), Salesforce.com (NYSE:CRM) and IBM (NYSE:IBM) have marked the area as a growth area within their operations.

German-based SAP (NYSE:SAP) already made an actual move after acquiring SuccessFactors (NYSE:SFSF) for $3.4 billion at the end of 2011. Furthermore Akamai Technologies (NASDAQ:AKAM) acquired privately held Cotendo for $268 million.

Investment Thesis

As a result of Friday's disastrous day shares have fallen some 16% year to date and have fallen more than 50% compared to the all time high set at $45 per share in the beginning of 2011.

Factoring in a 15% revenue growth for 2012 revenues could come in around $835 million, with non-GAAP net profits around $75-$85 million. This would bring the valuation multiples down to 3.2 times annual revenues and 34 times earnings, which is a bit more reasonable.

Furthermore the valuation seems rather cheap compared to some of the closed deals in the cloud-based industry over the last year. SAP paid $3.4 billion for SuccessFactors which is expected to report $330 million in revenue for 2012. This compares to Riverbed's valuation of $3.2 billion, while the company is expected to generate revenues around $835 million. With many large technology players not having made a big acquisition yet, the opportunity for a take-out remains on the horizon.

Long term investors could scoop up some shares for the long term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.