Tuesday, September 11, 2007

Riverbed Technology (RVBD) Continues to be Weak

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You can see my thoughts on the weakness in Riverbed Technology (RVBD) last week here. The stock continues its downturn as the psychological barrier of $40 didn't provide much support. No major surprise there. With the stock firmly below its 50 day moving average of $43, the stock is now sitting at $39 which is where it bottomed out in the August drop (save for a few hours during the waterfall selling panic on the 16th). I added a tiny bit here today, but am awaiting the most likely scenario of a further drop to the 200 day moving average which is just below $36.

Charts like this are not very good ones to trade. The stock is sort of in no man's land - quite a bit below its 50 day moving average but still quite a way's away from its 200 day moving average. I did mentioned the overvaluation of Riverbed Technology versus Blue Coat Systems (BCSI) here, and this scenario of the 2 stocks reverting closer to each other's valuation seems to be playing out.

I see WR Hambrecht is out with a note, defending the stock and claiming some of the weakness is attributed to financial customers possibly pulling back on technology spending as they face fallout from the credit environment. Interesting theory, but I just think it's an overvalued stock compared to it's peers. Even if the stock of Riverbed falls to $36 (nearly 10% drop from here), it will be trading @ 56x 07 estimates and @ 45x 08 estimates. Compare this to Blue Coat Systems which at $77 is trading @ 40x 07 and 30x 08 estimates. Clearly Blue Coat remains the better value - but please note these are not 100% apples to apples competitors although they do have a lot of overlap now in the WAN space.

My goal/preference is to be more overweight Blue Coat Systems in the fund, over a smaller Riverbed Technology position, even though currently Riverbed is the larger position simply because its closer to my preferred price targets. I am hoping, if the market exhibits significant weakness, for a larger Blue Coat Systems fall.

Long Riverbed Technology and Blue Coat Systems in the fund; no personal positions


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