Riverbed Tech (RVBD) and Akamai Tech (AKAM) are two former high flying growth Tech stocks that have both been crushed on earnings this quarter, with Riverbed now 35% off highs and Akamai 47% off highs.
Riverbed now has just a $4.47B market cap and down to 25.1X forward earnings, while Akamai has a $4.41B market cap, and trades at 13.7X forward earnings. Both names appear ripe for takeover offers, now trading at a major discount to 2011 highs, and both still in growth stages that would make a nice addition to some of the larger Tech companies. Akamai and Riverbed have both been rumored as takeover targets for years, but at this point it actually makes sense.
One way to play for an eventual comeback in shares, whether via M&A or just a turnaround story, is with longer dated options. A strategy known as a "Covered Risk Reversal" is a way to leverage for an upside move, while also willing to buy stock at a discount if shares were to fall much further.
In the past week I have seen a trader in both AKAM and RVBD utilize risk reversals in January 2013 options, the Riverbed one straight, while the Akamai one was covered.
On July 28th I noted to clients:
"Riverbed Tech (RVBD) trades 5,000 January 2013 $45/$20 bull risk reversals at a $0.40 debit, playing a long road recovery for the shares that were knocked down more than 25% in the past week. Shares are moving off lows today and above its 100 week EMA, also the 2007 highs were $26.40, so a potential re-test bounce. There is a gap from October from $22.50 to just above $25, so that is also likely support. The strategy is a good one, a willing long of 500,000 shares if it continues lower, willing to get in at $20, at which point its an obvious value. Shares are now 27X earnings, 7.34X sales and 8.85X cash, still fairly rich. Analysts have missed the boat and most have $40 targets for shares. With a sub $5B market cap, Riverbed becomes a viable buyout play, which in that case this spread would pay off in a big way."
On August 3rd I noted to clients:
" Akamai (AKAM) with a large January 2013 bullish spread, similar to what was seen in Riverbed (RVBD) last week, trying to call a near bottom. The trader sold 5,000 $20 puts at $3 to buy 5,000 $25/$40 call spreads at $3.45, opening professional trade for a $0.45 debit. Shares have re-tested a key 2009 breakout level and are closing the session today at highs, also remains a potential buyout target, so a good looking trade."
Both stocks are showing early signs of bouncing at multi-year support levels, and it would not surprise me to see this strategy used in Juniper (JNPR) soon as well.
I like both of the trades noted above, but only for professionals that realize the risk involved, and are willing to get long stock.
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