Each week, I report the results of the Big Idea Portfolio, a collection of five tech stocks that I believe will crush the market over a three-year period. I’ve done it before; my last tussle with Mr. Market ended with me beating the index’s average return by 13.35%.
Real money was on the line then as it is now, which means any one of the five stocks you see below could cause me a lot of public embarrassment. This time, Riverbed Technology, Inc. (NASDAQ:RVBD) inflicted the most pain, but you wouldn’t know it from the scorecard. Riverbed reported disappointing results after the market closed Thursday night, after I had already calculated returns.
McCanne’s leaving no doubt makes investors nervous. Kennelly, for his part, talked up Riverbed’s “deep technical bench” that includes ex-members of senior technical teams at Cisco Systems, Inc. (NASDAQ:CSCO) and EMC Corporation (NYSE:EMC), among others. “We will miss Steve, but it’s more of a sentimental loss than an operational loss,” Kennelly said.
A big claim, to be sure, but it resonates when you look at the numbers:
1). Revenue improved 17% to $237.4 million, better than the $234.8 million Wall Street was expecting. Adjusted profits came in even with estimates $0.29 a share.
2). OPNET contributed $6 million in GAAP revenue over 13 days operating as a Riverbed subsidiary. Annualized, that amounts to a $168 million business — roughly consistent with what we’ve seen OPNET deliver in years past.
3). Most important, gross margin held firm while deferred revenue (i.e., upfront cash payments for support contracts) soared 56% before accounting for any contributions from OPNET.
Taken together, these figures suggest to me that Riverbed is still early in its growth cycle. Integrating OPNET will take time, of course — which explains why Q1 guidance came in light — but the essential elements for sustained growth are here.
What’s the Big Idea this week?
Riverbed wasn’t my only underperformer. Rackspace Hosting also fell substantially ahead of Tuesday’s earnings report. I’m scheduled to speak with CEO Lanham Napier following the news, so look for an update here next week. For now, the Big Idea Portfolio is still struggling to keep pace with the comparable S&P 500 SPDR, which reclaimed 256 basis points since my last check-in.
Not that Mr. Market has been on fire or anything. All four indexes are down for the week as I write this, led by the Dow’s 0.47% decline. The Nasdaq fell nearly as much, off 0.44%, while the small-cap Russell 2000 gave back 0.34% and the S&P 500 fell 0.25%, according to data supplied by The Wall Street Journal. Here’s a closer look at where I stood through Thursday’s close:
