Why Buying NetApp Inc. (NTAP) Now Makes Sense

Page 1 of 2

Over the past three months, shares of NetApp Inc. (NASDAQ:NTAP) are up almost 40% since reaching a low of $26.26. Ordinarily, this would imply that new investors are late to the party. However, despite this gain, the stock is down 13% over the past 12 months. While NetApp is still a dominant force in the realm of data storage — aka big data — there are increasing concerns that the company can’t ever overtake rival EMC Corporation (NYSE:EMC). But it doesn’t have to. The market has proven that it can support more than one leader. And after a solid Q3 report, there are signs that NetApp is poised for more gains.

NetApp Inc.Netting out a solid third quarter
Considering what has been a broadly soft earnings season for tech, NetApp investors weren’t expecting much, especially given International Business Machines Corp. (NYSE:IBM)‘s roughly 1% revenue decline. But NetApp delivered the goods. Revenue arrived 4% higher year over year and 6% sequentially. These are not breathtaking numbers, but sales showed good acceleration from Q2′s 2% growth. Product revenue was down slightly by 18 basis points, but advanced 6.5% from the prior quarter.

As expected, U.S. public sector revenue was down from the prior quarter, but was up 14% year over year. Likewise, branded revenue advanced 8%. Although this was not stated by management, it looks as if the growth in branded revenue inhibited the progress of product revenue. Regardless, the net effect is still the same; no reason to raise eyebrows. But it will nonetheless be encouraging if NetApp can reverse the trend in the fourth quarter.

There were some mixed results on the operating side. Although non-GAAP gross margin of 60.4% was consistent with management’s prior guidance, 53.1% posted in product gross margin was softer sequentially. Management attributed this to a shift in customer mix. Meanwhile, service gross margin advanced 1% sequentially, helped by lower costs. Operating income was impressive, up 8% year over year and 25% sequentially.

Need more “attack” and less “preserve”
It was clear that the company showed a focus on profitability and, in particular, cost management. To that end, operating margins of 17.1% arrived better than management expected, helped by a drop in operating expenses. While NetApp deserves credit for this, I do wonder how long can it keep costs down and still work to grow market share. While IBM is showing some signs of struggle, there will be a point when enterprise spending recovers. And NetApp needs to prepare for attack mode.

The company will need to distinguish itself — if not from EMC, certainly from IBM. I think management understands the opportunities that lie ahead. However, NetApp guided a bit conservatively. Fourth-quarter revenue is expected to arrive between $1.7 billion to $1.8 billion. This presumes roughly 7% sequential growth and 3% year-over-year growth. Although competition plays a major role in this outlook, investors should expect NetApp to be an outperformer going forward.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top 6 Tax Scams and How to Protect Yourself

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!