Jerry Kennelly talks like a man who slept through the B-school class on managing investor expectations. Although shares of Riverbed Technology have risen 520 percent in the past two years and doubled since July, he scoffs at the idea that his company, with $5 billion in market capitalization, is in a bubble. "We're just reaching a reasonable valuation," says Riverbed's co-founder and chief executive officer. "We're just reaching the floor of what we can be."
That may sound imprudent, but Kennelly—a CPA by training and former finance executive at tech highfliers Oracle (ORCL) and Inktomi—has reasons for optimism. Riverbed, along with others such as F5 Networks and Blue Coat Systems (BCSI), sells networking technologies that let companies run software housed in far-off data centers more efficiently. While there's no catch-all name for the market—"application acceleration" is about the best of them—these products are emerging as one of the fastest-growing new tech sectors to come along in years. "These companies have not seen their best days," says Gleacher analyst Brian Marshall.
That's despite a sell-off that followed F5's Jan. 19 earnings call, when the company predicted it would miss Wall Street's consensus sales forecast this quarter by 2 percent or less. By Jan. 24, shares had fallen 24 percent. Riverbed and Blue Coat also traded down. Yet analysts such as Marshall expect the application-acceleration market to grow more than 20 percent per year. He says the lower stock prices might make the companies attractive to the likes of Hewlett-Packard (HPQ), Oracle, or IBM (IBM). F5's market cap now stands at $8.8 billion. "Nobody could afford F5 at $150 a share, but it might make sense at $100," says Marshall.
The main reason for the bullishness is cloud computing. Corporations can theoretically save big money by moving e-mail, accounting, and other applications off individual PCs and into data centers—that is, the cloud. Rather than requiring techies to swarm offices for the constant updating of applications such as Microsoft Office, updates can happen once at the data center. That only makes sense if the software in question works as fast in the cloud as it would on a PC. The expensive way to acquire that speed is by purchasing lots of bandwidth. Riverbed's software circumvents the problem by minimizing the information that needs to be transferred between a data center and a company's headquarters, branch offices, and other facilities.
The company makes devices costing up to $250,000 that businesses install in their data centers, and complementary ones costing as little as $5,000, which sit in the various offices that connect to the data center. Commonly used files—say, PowerPoint sales presentations—are sent only once and stored on the cheaper machines, so they're instantly accessible to employees. Riverbed's gear quickly compresses the rest of the traffic, stripping out unseen bits such as e-mail headers. If someone in headquarters updates that sales presentation, only the new numbers are sent to the other offices—not the entire document.
Joseph Fusco, head of application development at British Telecommunications' (BT) U.S. services arm, says Riverbed's gear typically reduces the bandwidth necessary to run Office or Lotus Notes by more than 40 percent. "When people notice they can download a file in 20 seconds rather than 20 minutes, their eyes light up," says Fusco. The industry term for Riverbed's technology is WAN (for wide-area network) optimization. F5, for its part, makes more expensive machines that route traffic within the data centers, assigning computing tasks to those servers best prepared to handle them. F5 says its customers can get by with fewer servers, since the system makes sure each one is more fully utilized.
Fewer than one-fifth of companies have deployed application-acceleration technology, says Kennelly, so there's plenty of room for growth. "Every global company in the world will need this technology," he says. Riverbed had sales of $499 million in the 12 months ended last September. That gives it a 40 percent share of the WAN optimization market, up from 28 percent in 2009.
What about Cisco Systems (CSCO), the $40 billion-a-year king of the networking-gear business? Although Cisco recently started loading its own application-acceleration technology for free on some of its routers, analysts such as Erik Suppiger of investment bank Signal Hill say Riverbed's tech edge will keep it in front. Kennelly professes no fear of Cisco. "Routers are a Rust Belt industry. They're still necessary, but it's not where the excitement is," says Kennelly. "We'll be one of the great tech companies for the next 100 years."
Networking analysts have grown used to such Muhammad Ali-like pronouncements. "Jerry's a bit of a loose cannon," says Suppiger. Kennelly retorts: "I'm not a loose cannon. I'm ebullient about our business. And I've been right all along."
The bottom line: Riverbed CEO Kennelly's soaring optimism has been backed up by the company's impressive performance.