Why SolarWinds Shares Fell Off a Cliff

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 network management software company SolarWinds fell 23% today after the company reported second-quarter earnings.

So what: The second quarter wasn't terrible, with revenue growing 21% to $77.5 million and net income coming in at $22.8 million. On an adjusted basis the company made $0.40 per share, which was $0.04 ahead of estimates.

The challenge is that revenue fell short of the $78.9 million estimate and guidance was well short of expectations. The company expects revenue of $84.7 million to $87.2 million in the current quarter and earnings of $0.35 to $0.36 per share. Analysts expected $90.5 million in revenue and $0.39 in earnings.

Now what: The company's licensing revenue growth is slowing, and with shares trading at 31 times trailing earnings, the market has priced in a lot of growth. Slowing growth in its licensing business doesn't support that kind of multiple and analysts rushed to downgrade the stock or lower price targets as a result today. The company isn't in bad shape, but the stock may have gotten ahead of itself, and with its earnings multiple remaining high, I'll avoid the discount 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 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 Shares Fell Off a Cliff 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.