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Why Riverbed Remains a Good Short to $15

NEW YORK ( TheStreet) -- I will admit that of late, I have become an unabashed cheerleader of cloud computing companies. While names such as VMware (VMW), EMC (EMC - Get Report) and Red Hat (RHT) continue to impress the market with their recent earnings performances, one name however that continues to be absent in the discussion is Riverbed Technology (RVBD).

For one reason or another, the company continues to make a case against itself for why it deserves any consideration among the ranks of the top cloud companies on Wall Street. At one point investors weren't listening, but I think this time upon the release of its recent earnings announcement, I don't think the market has a choice but to take notice. The stock is in a free fall and there is no telling where it will rest.

In its most recent quarter, the company reported profits of $6.9 million, or 4 cents per share. This compares to having reported $13 million or 8 cents per share in the same period of a year ago. Excluding one-time charges, Riverbed earned 20 cents per share on 12% increase in revenue to $182.4 million. Analysts expected a profit of 20 cents per share and $186.1 million in revenue, according to FactSet. Product revenue rose 4% to $117 million and service revenue grew 27% to $65.4 million.

Although the company warned back in January that it had expected some slowness in its business by (then) admitting that "expectations for 2012 were too high", it was hard for anyone to expect a decline of 50% in profits. The company's gross margin dropped from the previous year by almost two points, while product gross margin came in much lower. For this performance, the company's CEO Jerry Kennelly offered the following:
"In a seasonally difficult quarter, we completed a major product cycle and achieved results within our guidance range. Looking ahead, we expect our new Steelhead, Granite, and Cascade products, along with Stingray and Whitewater, to form the basis for Riverbed's next leg of growth as we continue to execute on our vision to deliver a complete performance platform. Our competitive position is strong, our addressable market is growing, and we are optimistic about the opportunity before us."

Moving forward

As great as that upbeat comment sounds, it remains a challenge for investors to take this seriously. It is hard to not see these results as anything other than poor execution -- particularly when rivals such as F5 , EMC, and Juniper delivered much better results in the same macro environments. The obvious question should be, does management have what it takes to turn things around and convince Wall Street that the stock is not still expensive in despite the recent selloff as the graphic shows?
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