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Is Riverbed Technology, Inc. (RVBD)’s Stock Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Riverbed Technology, Inc. (NASDAQ:RVBD) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for
The graphs you’re about to see tell Riverbed Technology, Inc. (NASDAQ:RVBD)’s story, and we’ll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at Riverbed Technology, Inc. (NASDAQ:RVBD)’s key statistics:

RVBD Total Return Price Chart

RVBD Total Return Price data by YCharts

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 115.3% Pass
Improving profit margin (442%) Fail
Free cash flow growth > Net income growth 123.2% vs. (848.8%) Pass
Improving EPS 334.9% Pass
Stock growth (+ 15%) < EPS growth 11.1% vs. 334.9% Pass

Source: YCharts. * Period begins at end of Q1 2010.

RVBD Return on Equity Chart

RVBD Return on Equity data by YCharts

Passing Criteria 3-Year* Change Grade
Improving return on equity 129.9% Pass
Declining debt to equity Took on debt in 2012. Fail

Source: YCharts. * Period begins at end of Q1 2010.

Riverbed Technology, Inc. (NASDAQ:RVBD)How we got here and where we’re going
Riverbed Technology, Inc. (NASDAQ:RVBD) pulls together a solid five out of seven passing grades. However, that hasn’t stopped its shares from declining in the past year, and a precipitous fall in net income to near zero could be worrying. Thankfully, Riverbed still displays strong free cash flow growth, which, at its current level, gives the company a rather minuscule 10 price-to-free-cash-flow ratio. Can Riverbed keep rewarding shareholders and turn its declining net income around?

Fool contributor Tim Beyers recently noted the stock’s rather yo-yo performance this spring, as investors find themselves between underwhelming guidance and positive news on a major tie-up. Any rebound is sorely desired now, as shareholders were left reeling after a brutal post-earnings sell-off in February, and have yet to recover.

Riverbed Technology, Inc. (NASDAQ:RVBD)’s acquisition of OPNET is taking longer than expected to digest, and the company’s core WAN business looks to take a big turn for the better next year. Therein lies the problem — next year is still a ways away. In the interim, Cisco Systems, Inc. (NASDAQ:CSCO) has been fiercely contesting Riverbed’s WAN optimization leadership and, with a much larger war chest and much deeper pockets, the networking leader can certainly be viewed as a big threat. Riverbed has to meet this threat head-on with new leaders, as its CEO recently stepped down, and the company has been adding new executives this year, as well. This could be a good thing, but we analysts can only comment from the outside, and results of the new honchos’ decisions will take time to filter out. In the interim, its relatively low market cap could entice Cisco to come calling with an open checkbook.

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