How Did A $5M Revenue Cut Turn Into A $1.35B Market Value Drop?

| About: Riverbed Technology, (RVBD)

Clearly the market doesn't work in very precise ways, but honestly how does a $5M revenue cut in guidance lead to such a dramatic loss of market value? Maybe "fuzzy math" is at work.

Most investors probably saw that Riverbed Technology (NASDAQ:RVBD) lost nearly 29% of its market value on Friday. The company reported basically in-line Q112 numbers. Not too bad at this point considering the major product transition going on. Then the wheels started falling off during the conference call. The CFO guided to revenue that at the high end would miss the $202M Q2 estimate by roughly $5M.

Yes, anybody doing the math is probably struggling to understand the stock plunge. It dropped 29% due to a 2% reduction in revenue. All while investors should've known that the company was going through a product transition that would muddy up the financials for the 1H of the year.

7 Analysts Downgrade - Guess 8 Was Too Much

What is amazing is that a full 7 analysts downgraded the stock. See Barron's analyst summary here. This clearly highlights the follow the herd mentality that exists on Wall Street. Or maybe analysts still believe they can play the game that the downgrade occurred prior to market open so the stock decline doesn't count.

Regardless of these games, the most telling part were the reasons used by analysts. Several thought the demand for WAN optimization products have slowed while some think the adjustment to the sales group will have a major disruptive impact. Still better some think Riverbed is losing market share.

Conference Call To The Rescue

Any investor should listen to the conference call or read the transcript. Management refuted all of the analyst claims easily. Answers were precise and valid.

Competition has actually declined with the 3rd vendor pulling back. Further, most boxes sold in Q1 went into greenfield locations. In essence, these were all new customers with virtually no replacements as of yet. Management even estimated the market potential to be 10x the total products sold in the history of the product category.

Every comment on the conference call suggested that pipelines were building and ramping for multiple products. Some sales were delayed to test the new products and decide between the updated Steelhead or the new Granite product. Is that ultimately a big deal?

While the analysts questioned numerous issues, not one provided any concrete signs that business was moving to top competitor Cisco Systems (NASDAQ:CSCO) or that WAN optimization had reached max penetration.

Growth Story Remains Intact

At the end of the day, the company guided to 15% growth for Q212. Does that sound like the numbers for a stock that just imploded? Even better the implied 15% growth for the full year requires faster growth rates in the second half.

Note that to just reach 15% growth in Q312, it will require $219M in revenue. That will require over 10% sequential growth from Q2 or nearly $25M more than the Q2 guidance midpoint.

Sure the numbers were disappointing, but did it justify such a massive sell off? The stock now only has a enterprise value of $2.5B when considering $615M in cash and investments. That places the stock at an incredibly low enterprise value of 3x sales.

New Products

Amazingly, little of the discussion and focus has been on the new product lineup. The potential of the company to finally develop into a fully functional multi-product company now exists. In Q1, non-WAN revenue finally surpassed 10% and the new Granite and Cloud Accelerator products have great promise.

See below list of new products released in Q112:

  • Launched Steelhead® CX Series - dedicated wide area network (WAN) optimization appliances that overcome bandwidth and geographic limitations to make users more productive, data transfers faster, and applications perform seamlessly regardless of location.
  • Introduced Steelhead EX Series - multi-function, enterprise-class branch office appliances that build on Riverbed's award-winning WAN optimization solution and add a robust platform with more memory, solid state drives, and CPU capacity to support the Virtual Services Platform (VSP) and Granite™.
  • Introduced Riverbed® Granite, extending WAN optimization to support edge-VSI (edge virtual server infrastructure) that allows IT to consolidate and manage all edge servers in the data center.
  • Introduced Steelhead Cloud Accelerator, a jointly developed solution that combines Akamai's innovative Internet optimization technology and market-leading Riverbed WAN optimization technology to deliver end-to-end optimization for SAAS applications.
  • Delivered industry-first capabilities to the Cascade® application-aware network performance management (NPM) solution. Cascade Profiler is the first NPM solution to provide streamlined configuration for service monitoring across application delivery controllers including Riverbed Stingray™ Traffic Manager, F5 Local Traffic Manager, and others. Virtual Cascade Shark is the first product to offer continuous packet capture and performance analysis in virtual environments.


Investors need to ask themselves whether the company is losing market share to competitors or whether the market is saturated. Unless the answers are yes, the stock will move much higher.

Outside the random statements of analysts, no solid data exists that Riverbed has anything other than a very bright future with fast growth. Is this a Research in Motion (RIMM) or First Solar (NASDAQ:FSLR) situation where competitors are clearly stealing share?

Did you really just sell a stock with a top notch new product lineup on the concept that it lost market share in a sector that it dominates? Since when does the market share leader lose out when it introduces a new product?

Ultimately, an investor needs to be comfortable with management. Riverbed's management consistently told the story of customers delaying purchases to test new equipment. If you trust them, load up on the stock around Friday's close of $20. If you don't, why did you own the stock in the first place?

Disclosure: I am long RVBD, CSCO.

Additional disclosure: Please consult your financial advisor before making any investment decisions.