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Why Riverbed Remains a Good Short to $15

I will admit that of late, I have become an unabashed cheerleader of cloud computing companies. While names such as VMware, EMC, and Red Hat continue to impress the market with their recent earnings performances, one name however that continues to be absent in the discussion is Riverbed Technology.

For one reason or another, the company continues to make a case against itself for why it deserves any consideration among the ranks of the top cloud computing companies on Wall Street. At one point investors weren’t listening, but I think this time upon the release of its recent earnings announcement, I don’t think the market has a choice but to take notice. The stock is in a free fall and there is no telling where it will rest.

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In its most recent quarter, the company reported profits of $6.9 million, or 4 cents per share. This compares to having reported $13 million or 8 cents per share in the same period of a year ago. Excluding one-time charges, Riverbed earned 20 cents per share on a 12 percent increase in revenue to $182.4 million. Analysts expected a profit of 20 cents per share and $186.1 million in revenue, according to FactSet. Product revenue rose 4 percent to $117 million and service revenue grew 27 percent to $65.4 million.

Although the company warned back in January that it had expected some slowness in its business by (then) admitting that “expectations for 2012 were too high,” it was hard for anyone to expect a decline of 50 percent in profits. The company’s gross margin dropped from the previous year by almost two points, while product gross margin came in much lower. For this performance, the company’s CEO Jerry Kennelly offered the following:

“In a seasonally difficult quarter, we completed a major product cycle and achieved results within our guidance range. Looking ahead, we expect our new Steelhead, Granite, and Cascade products, along with Stingray and Whitewater, to form the basis for Riverbed’s next leg of growth as we continue to execute on our vision to deliver a complete performance platform. Our competitive position is strong, our addressable market is growing, and we are optimistic about the opportunity before us.”

Moving Forward

As great as that upbeat comment sounds, it remains a challenge for investors to take this seriously. It is hard to not see these results as anything other than poor execution — particularly when rivals such as F5 Networks, EMC, and Juniper delivered much better results in the same macro environments. The obvious question should be, does management have what it takes to turn things around and convince Wall Street that the stock is not still expensive in despite the recent selloff as the graphic shows?

Since reaching a high of $30.73 on Jan. 26, the stock is now down 40 percent to its most recent close of $17.99. Remarkably, even with the current selloff, the stock still sports a price-to-earnings ratio of over 50 and remains expensive when compared to a name such Citrix Systems and remarkably Riverbed still carries a price-to-earnings ratio twice that of EMC. So the questions, why are there still high expectations for a company that continues to disappoint the market?

Bottom Line

Clearly, there are some major challenges with Riverbed and it does not appear that management has a firm handle on what the issues are or how to fix them. While it seems excuses continue to be made for why it is not living up to expectations, investors need to ask themselves how much time they are willing to wait until management figures it out. But in the process, other opportunities are coming and going — many of which not only present much better value than Riverbed, but also have management teams that consistently demonstrate that they know what they are doing. I would not touch the stock at current levels and it might yet be a good short toward what I would gauge as a near-term bottom at a price of $15.

—By Richard Saintvilus, contributor, TheStreet.com

Additional News: Riverbed Technology Slides After Profit Falls

Additional Views: Red Hat CEO on Stock’s ‘Red-Hot’ Run

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Disclosures:

TheStreet’s editorial policy prohibits staff editors, reporters, and analysts from holding positions in any individual stocks. At the time of publication, Richard Saintvilus held no positions in any of the stocks mentioned, although positions may change at any time.

Disclaimer

Symbol
Price
 
Change
%Change
CTXS
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EMC
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FFIV
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JNPR
---
RHT
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RVBD
---
VMW
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