Active investor Paul Singer has picked up a significant stake in NetApp Inc. (NASDAQ:NTAP). According to Businessweek, his firm, Elliott Management, might press the company for board seats to unlock shareholder value. NetApp is also in the portfolio of Larry Robbins, Joel Greenblatt, and Paul Tudor Jones. Since the beginning of the year, NetApp has risen close to 13%, lagging the S&P 500’s return of nearly 17%. Should we follow Paul Singer into NetApp? Let’s find out.
Fast growing, cash cow, and a strong balance sheet
NetApp Inc. (NASDAQ:NTAP) is the leader in innovative storage systems and data management solutions with two storage platforms, unified FAS storage systems and E-Series systems. The majority of its revenue, $4.21 billion, or 67.5% of the total revenue, was generated from product sales. Service sales ranked second with $1.2 billion in revenue in 2012, while software entitlements and maintenance contributed only $812.2 million in 2012. Its two biggest distributors were Arrow Electronics and Avnet, accounting for 17% and 12%, respectively, of the total revenue in 2012.
In the past five years, NetApp Inc. (NASDAQ:NTAP) has experienced decent growth in revenue and net income. Revenue increased from $3.3 billion in 2008 to $6.23 billion in 2012, while net income rose from $310 million to $605 million during the same period. What makes me interested in NetApp is its improving cash flow. The operating cash flow has increased from $195 million to $1.46 billion since 2003, whereas free cash flow has climbed from $134 million to more than $1 billion. Furthermore, NetApp has a strong balance sheet. As of January 2013, it had $4.62 billion in equity, $6.72 billion in cash and short-term investments, and only $2.23 billion in debt. The market values NetApp at 10 times EV/EBITDA.
Another global leading company in the storage system industry
Compared to its peer, EMC Corporation (NYSE:EMC), NetApp Inc. (NASDAQ:NTAP) has a higher EV multiple. The market values EMC at around 8.3 times EV/EBITDA. EMC is also one of the global leading companies in the IT information storage industry with two broad categories: EMC Information and VMware Virtual Infrastructure. The Information Storage segment was the biggest revenue contributor, with $15.6 billion in revenue, while the VMware Virtual Infrastructure ranked second with nearly $4.6 billion in sales.
EMC Corporation (NYSE:EMC) has kept innovating its products for better cloud infrastructure technology. In the middle of May, it announced the New EMC Proven Solutions for private clouding computing for customers to move SAP solutions workloads to private cloud infrastructures. Moreover, the new solution has automated disaster recovery of SAP solutions, including application consistent failover, point-in-time recovery, and non-disruptive failover testing.
According to IDC, in the fourth quarter 2012, both EMC Corporation (NYSE:EMC) and NetApp Inc. (NASDAQ:NTAP) grew their storage revenue by 7.3% and 6.3%, respectively, while Hewlett-Packard Company (NYSE:HPQ) experienced a drop in storage revenue. The revenue of Hewlett-Packard’s total disk storage systems decreased 8.8% to $1.4 billion, while the external disk storage systems revenue came in at only $626 million, 7.4% lower than the fourth quarter in the previous year.