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Network Appliance Stock Retreats to Higher Ground

Network Appliance (NTAP - Get Report) shares took a beating Wednesday, losing 7% of their value after a sell-side note panned the stock on a day when most tech issues did poorly.

But the storage vendor's selloff may be the right medicine for an equity that even its fans were calling expensive.

"At $38, this stock was priced to perfection," said T. Rowe Price analyst Chirag Vasavada. "But as it pulls back, it looks more interesting," he said in an interview. Vasavada's company did not hold shares as of the latest filing period.

Indeed, since hitting a 52-week intraday high of $38.50 on April 20, the stock has depreciated by nearly 26% to $28.60 as of Wednesday's close.

This week's slide was apparently triggered by Kaufman Brothers analyst Shebly Seyrafi, who published a note replete with worries, including a rising finished-goods inventory, weak channel checks in Europe, concerns about sales to the federal government and a still historically high price-to-earnings ratio.

Seyrafi noted that the company's latest 10-K filing disclosed that NetApp's finished-goods inventory increased from $34 million, or 53% of inventory, in the third fiscal quarter, to $46 million, or 72%, in the fourth quarter -- the highest level since at least 2000. A more typical level is 50% to 55%, he said. Kaufman Brothers does not have an investment-banking relationship with NetApp.

The company's 10-K filing on Monday also revealed that NetApp received a comment letter from the Securities and Exchange Commission relating to a "routine review" of company filings. The disclosure may also have contributed to Wednesday's selloff, said Baird analyst Daniel Renouard.

However, he said the letter appears to be a standard inquiry regarding accounting practices typically received every few years by all companies and "unrelated to option-granting practices. Thus we view it as a non-issue," he said in a note to clients.
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