OK, the buzz-phrase “wide-area network optimization” sounds hopelessly boring. But for investors, it has been magic.
WAN optimization technology helps speed the delivery of high amounts of data across computer networks. As companies get larger, and have to deal with far-flung global operations, this is a big help.
And one of the top players in the WAN optimization market is Riverbed Technology (Nasdaq:RVBD). Over the past three years, the gains on the stock have seen an annual average return of a stunning 79%.
Can the shares keep up this torrid rate? Here’s a look at the pros and cons:
Pros
Powerful technology. When it comes to WAN optimization, Riverbed is best-of-breed. It frequently introduces new innovations, trying to find ways to increase speed, reduce bandwidth usage and lower costs. The platform also integrates with many applications, such as those from Microsoft (Nasdaq:MSFT), Oracle (Nasdaq:ORCL) and IBM (NYSE:IBM).
Riverbed also has introduced some cutting-edge products in areas like cloud computing, which is a fast-growing area of the tech market.
Strong growth. In the latest quarter, Riverbed posted a 45% increase in revenue, with product revenue growing 50%. At the same time, Riverbed has been able to expand gross margins, which are now 76.2%. The company remains vigilant with its expenses and is also benefiting from its larger scale.
Enormous market potential. Riverbed has more than 9,200 customers, with about 76% from the Forbes Global 100. They span every major industry as well as business size – even small companies.
However, Riverbed is only getting a small piece of the large-market opportunity, which is expected to continue to grow at a fast rate for years to come.
Cons
Competition. The WAN optimization market is rife with strong operators. The top ones include Cisco (Nasdaq:CSCO), Juniper Networks (Nasdaq:JNPR), Citrix Systems (Nasdaq:CTXS), F5 Networks (Nasdaq:FFIV) and Blue Coat Systems. But there are also many startups that are gunning for the market. As a result, there is likely to be more pressure on pricing and margins in the future.
Channel strategy. Riverbed relies primarily on partners to sell its products. This certainly has its own risks, such as in terms of quality control and maintaining close contact with customers.
Valuation. Like any growth company, the shares of Riverbed are not cheap. They are selling at about 162 times earnings. If anything, the shares are priced for near perfection. So, even a small disappointment can lead to a big drop in the stock price.
Verdict
Even with the high valuation and tough competitive environment, Riverbed continues to be a dominant player in the WAN optimization market. It knows how to continue to innovate and drive performance for its customers.
And with the surge in cloud computing and video, there will be lots of growth for Riverbed’s core products. In other words, the pros outweigh the cons on the stock — so long as investors can deal with periodic bouts of volatility.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.
