NetApp Its Survival May Require a Buyout From Cisco or Oracle

NEW YORK (TheStreet) -- Without question, NetApp (NTAP) and EMC (EMC) are the two dominant names in the critical data storage market that is always a top priority within enterprise IT.

Though these two giants have traded neck-and-neck over the past couple of years, however, it would appear recently that Wall Street has made up its mind in that all important question -- which of the two presents the better value?

Nonetheless, for as much as I like EMC's business and what it has been able to accomplish, from my vantage point, NetApp has become a bit more intriguing if for no other reason than the options that its recent valuation represents.

One such option requires the answer to the question, can the market support two data storage names equally within the sector? And if so, will investors ever be satisfied with what will certainly result in shrinking margins in order to increase sales as the cloud takes shape?

As the chart below shows, Wall Street continues to side with EMC and appears more comfortable with the promises that it has made.

For NetApp, since reaching a high on the year of $46.80 on April 3, the stock is down 40% -- remarkably this comes on the heels of the company not only having reported better-than-expected third-quarter earnings results, but also offering an outlook in line with Wall Street expectations.

However, on the heels of its recent fourth-quarter report, I expected investors to see things more clearly. Except Wall Street had different ideas and instead focused more on the company's outlook and less on its actual numbers -- which were better than good. Not only did it report revenue that increased almost 20% annually, but it demonstrated organic growth that arrived in the high single digits, while also showing that it can compete effectively against both EMC and IBM ( IBM) in sales of its high-end systems.

NetApp also did well from the standpoint of profitability as both its gross and operating margins continue to grow quarter-over-quarter and annually. As noted previously, the story during the announcement was its guidance -- which immediately sent shares tumbling as Wall Street scrambled to digest what the company's management was possibly thinking. However, what was disappointing is that investors appeared unprepared for the outlook although Cisco ( CSCO) and (just the day before) computer giant Dell ( DELL) opted to play guidance conservatively in light of the ongoing fiscal challenges in Europe.

Though the company's management lowered revenue estimates by 8% and dropped EPS by almost 40%, astute investors should be able to understand the implication of the guidance -- regardless of degree. For that matter, the company is ending one fiscal calendar and entering the next, so there is a chance that it is indeed under-promising to over-deliver. I suspect that is the case, but it is going to take some time to unfold. One can also continue to look into EMC's guidance for clues.

However, in the meantime, it would seem that investors continue to abandon ship. What does it mean for the long-term implications of the stock? And how low will it go before a name such as Cisco or Oracle ( ORCL) two enterprise titans with goals of cloud domination make a play for NetApp and what is still a great business? What is clear to me is that the company's declining stock price is not only oversold, but grossly unjustified. The fact of the matter is its recent decline is disproportionate to its performance. For this reason, I think investors' loss might eventually be Cisco's or Oracle's gain.

Bottom Line

As the cloud starts to form and businesses begin to fully embrace the benefits offered through a migration, both Oracle and Cisco will want to further their one-stop-shop strategies and realize that data storage will be a critical component within their portfolio of services -- particularly for Oracle which already specializes in data analytics. So from the standpoint of synergy, it makes sense to acquire a company that specializes in data storage -- one that has not only been growing its market share, but has done so by consistently by making data an area of focus and establishing an approach to storage architecture that appeals to a broad range of customers.

So while EMC and to some extent names such as F5 ( FFIV) and Juniper ( JNPR) continue to receive the lion's share of analysts' coverage, investors would be wise to also start paying attention to what is going on at NetApp. Though the stock may now appear as a disappointment, nothing on Wall Street generates more excitement than M&A.

As with anything, it requires being at the right place and at the right time. For all of the reasons stated above, holding and or buying NetApp remains a decent bet.

At the time of publication, the author was long CSCO and ORCL.

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