Why SolarWinds Stock Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of SolarWinds dropped 14% today as investors reacted to the company's acquisition plans.

So what: Yesterday, the company announced it will buy N-able, a cloud-based IT infrastructure company, for $120 million. This is expected to reduce 2013 earnings and there's no guarantee the acquisition will pay off, so investors sold off shares today.

Now what: BMO Capital Markets analyst Karl Keirstead predicted the acquisition will reduce earnings by $0.11 this year, a significant amount when you expect acquisitions to add to a company. The stock was already richly priced at 29 times 2013 estimates before trading started, so this only makes that multiple look worse. There's a lot of risk in this acquisition, and given the stock's steep price, I'm definitely not a buyer today.

Interested in more info on SolarWinds? Add it to your watchlist by clicking here.

It's incredible to think just how much of our digital and technological lives are almost entirely shaped and molded by just a handful of companies. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.

The article Why SolarWinds Stock Dropped originally appeared on Fool.com.

Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.