Riverbed Technology, Inc. (RVBD)’s Punishment Seems Overdone

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Then again, aside from these logistics, this was a deal that Riverbed had to make to keep up with Cisco, which has put together a string of deals as it looks to offset its struggling hardware business. These include paying $141 million in cash for Cariden, followed by $1.2 billion for Meraki. Most recently, Cisco acquired BroadHop to help strengthen its position in enterprise mobile. And before these deals Cisco had not performed all that well against Riverbed in WAN optimization. The net effect of these recent acquisitions will put Cisco in a better position to attack Riverbed.

Riverbed understands this. And given OPNET’s application management business, or APM, which is growing at a 30% rate and makes up more than 60% of sales, Riverbed now has a way to offset potential weakness in WAN optimization. The good news is, the current weakness in WAN might be temporary. While citing research from Gartner, Inc. (NYSE:IT), the company believes that 2014 will be a breakout year. Gartner estimates that by 2014, roughly 80% of end-user traffic will be in WAN.

This means that as long as Riverbed hangs on to its WAN lead, it will be on the receiving end of significant demand. This now makes Riverbed a very attractive takeout candidate, especially since it’s lost 20% of its value. With a market cap of just $2.5 billion, the first and obvious suitor would be Cisco, which has $45 billion in cash and can close this deal tomorrow if it wants to.

Just near-term bedbugs
Riverbed has an excellent management team, one that is more than capable of fixing what I consider just near-term bedbugs. In the meantime, the company deserved more patience than it has received from investors. Granted, the stock is far from cheap at a P/E of 48. But given its high-teens revenue growth, coupled with Gartner’s projected WAN demand, this company should trade in the $20s. And any synergies Riverbed can realize with OPNET will simply be icing on the cake. I would be a buyer here on this weakness, as this drop seems exaggerated. Investors should stop crying a river.

The article Riverbed’s Punishment Seems Overdone originally appeared on Fool.com and is written by Richard Saintvilus.

Fool contributor Richard Saintvilus has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems, F5 Networks, Riverbed Technology, and VMware. The Motley Fool owns shares of F5 Networks, Riverbed Technology, and VMware.

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