When Network Appliance ( NTAP) ratcheted down its guidance in early August, plenty of investors took the network storage company off the radar screen. But that's changing fast. Shares have run up nearly 30% since early October -- five times more than the Nasdaq -- and the company's charts indicate that there's still upside, says Rob Funk, of RGF Capital Partners, a New York-based hedge fund. Funk, who doesn't hold NetApp at the moment, notes that the 50-day moving average is trending up and more importantly, the downtrend that started in mid-December of 2004 has been broken. As a short-term buy, it's a little pricey at $30. Funk would like an entry point of about $28. But as a longer-term play, it looks very good, he says. If investors needed more convincing, they got it in the shape of this week's
solid second-quarter earnings announcement . "NetApp surprised us by bouncing back from last quarter's miss as quickly and as strongly as it did, making the stock that much more attractive, even at current levels, for momentum investors seeking one of tech's highest organic growth rate companies," Goldman Sachs hardware maven Laura Conigliaro said in a note to clients. Indeed, NetApp grew revenue by nearly 29% in the September quarter, while rivals EMC ( EMC) grew 16.5% and Hitachi Data Systems 24.7%. Of course NetApp is growing on a much smaller base. A year ago, NetApp posted revenue of $375.2 million, while EMC's revenue was a bit more than $2 billion. However, Conigliaro, whose firm has banking relationships with NetApp and EMC, has some concerns about valuation; the stock is trading at 30 times 2006 earnings estimates -- or 43 times when the cost of expensing options is included. She also notes that NetApp and EMC "could be on a collision course."
In fact, they already are. NetApp's bread-and-butter is a niche (albeit a big one) called network attached storage. Simply put, NAS, as the technology is known, is used to add storage to a network by simply plugging in a dedicated box. The box, in turn, makes the data readily available to users on the network. EMC generally plays in a related area called storage area networks, which store huge amounts of data off the main corporate network. EMC also has a hand in NAS, notably at the high end of the market. But in August, EMC bought privately held Rainfinity for about $90 million. Rainfinity sells a product that allows administrators to "virtualize" NAS storage, which means data can be stored anywhere, while appearing to be stored locally, and that should resonate in the midtier. The NAS market is worth pursuing. In 2004, it totaled $1.4 billion, and it's expected to grow at a compounded annual rate of 8.8% through 2009 when it will reach $2.2 billion, according to Gartner, a Connecticut-based market research and technology consulting firm. Meanwhile, NetApp and IBM ( IBM) have signed a partnership deal that could give the storage vendor much broader distribution. A similar partnership between EMC and Dell ( DELL) has been a big success, and the new alliance could help NetApp tip the scales a bit. "Potentially, it's very significant for NetApp," says Chuck Jones of Atlantic Trust Stein Row. However, IBM's product partnerships haven't always been much of a help to the junior partner, he adds. Even so, IBM's forays into the NAS market have not been successful, so Big Blue should be motivated to make this alliance a successful one, said Jones. Like Funk, Jones sees the company as a longer-term play. "I don't expect to see much upward movement in the stock in the next three or six months, but further out -- nine or 12 or 18 months -- it looks strong."
Et Tu, Scott?Oracle ( ORCL) CEO Larry Ellison never seems to worry about being popular -- and that's a good thing these days. What with Microsoft ( MSFT) and SAP ( SAP) teaming up to beat on the database giant and Wall Street wondering when (or if) his $13 billion acquisition binge will pay off, you'd think he'd like some love from his friends. Well, he didn't get any this week from longtime ally Scott McNealy, CEO of struggling Sun Microsystems ( SUNW). Sun, which desperately has been trying to boost sales of its powerful, but not so popular Solaris operating system, is going to give away copies of Postgres, an open-source database. Sun will start distributing Postgres with Solaris immediately and will integrate it into the operating system in the first half of 2006. Postgres obviously won't make a material difference to Oracle's database franchise, but the move is surprising because the two companies have been close. Oracle, for example, was the first major adopter of Sun's Java programming language, and Sun's products are optimized to work with Oracle databases. Asked about the seeming rift with a key partner, John Loiacono, Sun's executive VP for software, said: "We'd love to see Oracle move in this direction itself." But until Oracle makes an open-source version of its database, Sun will distribute the best alternative, he said during a conference call. Oracle didn't have a comment on the Sun announcement. The reason? Industry sources said the move caught Ellison & Co. by surprise and the crowd at Redwood Shores, Calif., was still trying to make sense of it. Sun's venture into the database world could be more than a symbolic slap at MySQL, a Sweden-based provider of open-source databases that has become something of a darling to Silicon Valley's digiterati.
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