Red-hot chipmaker AMD pops on surprise Q2 profit >>> READ MORE

Trade of the Day: Riverbed Technology (RVBD)

The customer pool for RVBD's high-end product is limited


Riverbed Technology (RVBD) took a beating Wednesday after missing its quarterly revenue mark and swinging to a loss. The fast money is not happy with the evaporation of growth catalysts, but with so much fast money piled into this chart, we could easily see another 8% to 10% come out of these shares – making RVBD an ideal put trade idea.

Like a lot of high-performance technology stocks, RVBD flew high when the bulls could tell each other that demand for network equipment, faster than lightning and priced to match, would keep accelerating until these companies became the Cisco or EMC of their generation.

Cisco ‘Internet of Things’ Has Mind-Blowing Potential
Cisco ‘Internet of Things’ Has Mind-Blowing Potential

However, growth curves that slant up forever are few and far between, especially when you’re dealing with a premium product that caters to a relatively narrow base of customers. RVBD hubs aren’t exactly the $30 routers you can buy at Radio Shack to supply a home or small business. Each of these boxes can cost $2,000 to $4,000 per network port, so you need a lot of money, a big network and a real need for speed to even be interested in what it can do for you.

Now it looks like RVBD has hit the wall of just how big that pool of potential users really is. The newly acquired software product line has already depleted its sales pipeline, and market share gains look challenging for the near future. Furthermore, while core hardware revenue is still growing at 18%, the federal sequester has chilled government IT budgets for this kind of equipment.

For a less assuming play, these headwinds would force traders to re-rate, lower their targets and move on. But with RVBD already priced for perfection, even yesterday’s carnage may not be enough to cover the market’s disappointment here. Even after a disastrous close, RVBD carries a P/E north of 60, four times what the relatively “humble” CSCO is worth on a current earnings basis.

When you consider that RVBD was flirting with levels below $14 a quarter ago when expectations were still fairly rosy, you can see that it’s quite possible this chart will retrench at least that far now that the future looks a lot bleaker. Beyond that, intermediate support drops away fast, and the ultimate bottom could be as low as $9 to $10.

With the stock closing Wednesday at $15.64, all puts above $15 are currently in the money. I often like to go a little into the money to dampen risk but still generate sizable profits. The August $16 puts (expiring August 17) closed Wednesday at $0.68. Should the stock move back down to $15, the puts would nearly double. A steeper pullback to $14, as we discussed, would bring profits in the neighborhood of 140%.

When you get below the August $15 puts, liquidity falls away fast, but if RVBD deteriorates faster than the market currently expects, order flow should open up. Although a few August contracts as low as $8 are open now, that kind of decline combined with the slide already on the books would take this stock back to credit crunch levels – and in that event, the knife falls extremely fast.

Move out to January 2015 and the chain gets bearish, with most of the in-demand puts being written at $8 to $15. Until you see a clear sign that RVBD has its momentum back, that’s probably where the action will be.

Hilary Kramer is one of Wall Street’s most successful equity analysts and investment managers, with a reputation as a leading expert on today’s market movements, stock trends and economic outlook.

She is also the editor of three financial advisory services designed to help individual investors profit from her stock picking talents — Hilary Kramer’s GameChangers, Breakout Stocks Under $10, Absolute Capital Return Portfolio and High Octane Trader.

Article printed from InvestorPlace Media,

©2017 InvestorPlace Media, LLC