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

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

The 10 Biggest Outlet Malls in USA

The 5 Most Popular Rap Songs of All Time

The 10 Countries that Eat the Most Meat

The10 Most Expensive Countries to Fly To

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!