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Why Riverbed Is a Diamond in the Rough


The company is the industry leader in its market segment.

It's said that a person's true character is exposed under pressure. I think the same can be said for companies as well.

Late last year I wrote about Riverbed Technology (RVBD) as a good candidate to have its fundamentals buck the economic downtrend. The company makes the Steelhead family of appliances (i.e. hardware/software) that accelerate wide-area-network (WAN) access. In this particular market segment, it's the industry leader.

Riverbed's customers report that application performance increases five to 50 times prior levels along the 60%-95% reduction in bandwidth utilization. Consequently, an IT manager may be able to scale back to a slower and lower cost connection or avoid the need to spend on a more expensive link. Either way, those are real dollars saved.

What makes its solution even more attractive is that it doesn't require a massive up-front expenditure. Riverbed offers Steelhead appliances across a broad spectrum of sizes and prices. The company's typical "purchase" is less than $100,000 and, according to IDC, Steelhead appliance customers' average return on investment is 7.3 months.

It's that return on investment and ability to reduce costs at a time when cost reduction is job number-one that enables Riverbed's products to buck the trend.

Don't take my word for it -- look at the numbers. By any measure, 2009 has been a disaster for virtually every company. If you take a quick look at the graph below, you'll see the year-year revenue growth rate for the year-to-date period of a number of communications-equipment companies. Despite the pain and suffering throughout the industry, Riverbed's performance jumps out in an extremely difficult environment. Why? Because the products do what they claim to and it saves customers real money.

The company's third-quarter-2009 results were another testament to the value Steelhead appliances provide. Revenue increased 18% year-year with very solid (76%) gross margins and more than $0.50 per share in cash from operations.

Riverbed isn't an inexpensive stock, but it's not wildly expensive given its fundamentals. This is a company with more than $4.00 per share in cash, no debt, a margin structure many would kill for, and a product suite IT managers want and need.

Put it all together and that makes Riverbed one of those diamonds in the rough we'd all like to discover.

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No positions in stocks mentioned.
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