Network Appliance Stock Retreats to Higher Ground
Renouard, whose company does not have an investment-banking relationship with NetApp, said the finished-goods inventory build appears related to new-product launches and not to softening demand. He said the current weakness in the stock is "related to mostly spurious issues" and added that the downturn "presents a more attractive entry point."
Analysts have been concerned about the company's lofty valuation, particularly when the expense of employee stock options is factored in. On that basis, NetApp is trading at about 43 times 2007 earnings (before Wednesday's slide), compared with 15 times for rival EMC (EMC), according to Seyrafi.
Offsetting that concern for some has been the company's surging top-line growth. In the last two reported quarters, revenue grew by better than 30%, and the company's guidance for the current quarter calls for revenue to increase by 36% to 39% from a year earlier.
This growth rate is all the more impressive when compared with the industry's rather anemic compound growth rate of 5.4% for the next five years, says IDC storage analyst Brad Nisbet. The market for external storage systems, the heart of the storage business, is expected to grow to $22.7 billion in 2010 from $17.4 billion in 2005, according to IDC.Although NetApp's forecast may sound aggressive, Loomis Sayles analyst Tony Ursillo said "they set a conservative level of guidance for sales and margins. In the past, though, management let expectations get ahead of reality, and that was a stumbling block." His company is one of NetApp's largest shareholders. Reining in its guidance is just one of the changes that has made NetApp an attractive buy. Once a provider of relatively low-end hardware for network-attached storage, the Sunnyvale, Calif., company has made a number of well-regarded acquisitions and a strategic alliance with IBM (IBM), moves that have given it the chops to compete for business in the lucrative storage area network market.
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