Reasons for Sharp Decline in SolarWinds

SolarWinds SWI, a provider of IT management software, announced the purchase of N-able Technologies after the close Tuesday, resulting in shares falling sharply today and a series of analyst downgrades.

N-able runs a cloud based system that monitors a IT infrastructure, maximizes IT performance and keeps overall IT costs down for businesses. As stated in their press release, SolarWinds stated the addition of N-able will allow the firm to serve small businesses and support customers with cloud capabilities.

SolarWinds acquired the firm for $120 million cash with the acquisition expected to end in May.

A possible concern for investors is the $120 million in cash paid while SolarWinds had only $307 million of current assets, as of March 31st; $221 million of that figure is cash. Although only $120 million was paid for the company, the drop in share price represents almost a 500 million dollar drop in market capitalization. This suggests that investors highly value cash or are overreacting to the acquisition.

One can also speculate that investors are concerned about about SolarWind’s ability to continue as a growth stock. With a P/E of 35 compared to an industry average of 24, investors expect the company to continue growing with the share price rising steadily since their IPO in 2009. This acquisition may be the first sign that SolarWind’s organic growth is slowing and the company now needs a new vehicle to carry its forward momentum. If this is the case, investors are justified in correcting the share price to one closer to that of a value stock, which is often a P/E near 20.

Shares are currently trading down 14.06 percent at $41.17 from Tuesday's close of $47.91.