Saturday, January 10, 2015

Solarwinds (SWI) Sell Thesis

After a record 2Q14 we rode the hype wave to $45.00. After an exceptional 3Q14 beat we continued until $52.00 and then; enough was enough as selling for 50x ttm earnings made us queasy. As we described in the 3Q14 report we maintained our PT and downgraded the name to a hold due to all positive future catalyst being priced in. See below excerpt from 3Q14:

"As a reminder after our double down in late June our average share price increased to $35.59. Currently we are up ~35% on the name. We continue to be encouraged by the results and operating leverage in Solarwinds business model. That being said we believe the near term positives are largely priced in at current levels. We are downgrading our rating to a HOLD and maintaining our PT of $52.00 which assumes a 27.1x multiple to our FY15 EPS of $1.95. Over the last 3 years the stock has sold for ~29x forward earnings. We believe the slight discount is attractive as the Pingdom acquisition, license growth acceleration and operating leverage of business will likely lead to higher profitability and further multiple expansion."

While we are still positive on the stock all catalyst have been in our frank opinion "priced in".  The company hit a 52 week high of $53.44 before starting a descend. We locked in a 35% profit selling at $52.21 and will be waiting on the sidelines for an attractive re-entry point. 

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