Sifting for Digital Diamonds

A few months ago I wrote about Riverbed (RVBD - commentary - Cramer's Take)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 market, it is the industry leader.

Riverbed's customers report that application performance increases 5 to 50 times prior levels along with a 60% to 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 the solution even more attractive is that it doesn't require a massive upfront 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 is that return on investment and ability to reduce costs at a time when cost reduction is task no. 1 that enables Riverbed's products to buck the trend.

The company's fourth-quarter 2008 results were another testament to the value Steelhead appliances provide. Revenue increased 21% year over year with solid 75% gross margins. Pro forma EPS in the quarter of 19 cents exceeded the street consensus as well, not a very common event these days.

Riverbed has generated cash from operations for the last two years, sits on about $3.75 in net cash (no debt) and is probably one of the best positioned companies in the networking arena. With guidance for revenue growth of 14% to 18% in the upcoming quarter at a time when most are slashing numbers, Riverbed is one of those diamonds in the rough we all would like to discover.

Another company that is largely undiscovered and falls into this category is Alvarion (ALVR - commentary - Cramer's Take), a little-followed Israeli-based provider of WiMAX base station and customer premise equipment (CPE). More important, like Riverbed, it's the leader in its market.

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At the time of publication, Faulkner had no positions in the stocks mentioned.

Bob Faulkner has been in the investment business for 18 years with an exclusive focus on technology stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Faulkner appreciates your feedback; click here to send him an email.

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