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 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

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!