NetApp: Too Late for Cisco or Oracle?

NEW YORK ( TheStreet) -- At one point, big data giant NetApp ( NTAP) was trading at such depressed levels I considered it the top acquisition candidate on Wall Street and suggested that either Cisco ( CSCO) or Oracle ( ORCL) should make a play for it.

My argument was based on the premise that as businesses begin to fully embrace the concept of "the cloud," both Oracle and Cisco will want to further their one-stop-shop strategies and make data storage a critical component within their portfolio of services -- particularly Oracle which already specializes in data analytics.

So from the standpoint of synergy, it makes perfect sense to acquire a company that specializes in data storage. NetApp has not only been growing its market share, but has done so consistently by making data an area of focus and establishing an approach to storage architecture that appeals to a broad range of customers.

What's more, at the time I offered that opinion, the stock was making a new 52-week low. Fortunately or unfortunately, the company has since been performing and executing a bit too well. As a result, it just might have priced itself out of M&A contention.

Recenlty, in its first-quarter fiscal 2013 earnings report, NetApp announced net income of $64 million or 17 cents per share on revenue of $1.445 billion -- arriving in line with its previously stated guidance. On a non-GAAP basis, EPS arrived at $156 million or 42 cents per share. The company beat street expectation on earnings while meeting analysts' revenue forecasts. The company's president and CEO Tom Georgens offered this:
NetApp produced non-GAAP earnings per share above and revenue in line with our prior guidance. In Q1, we announced further innovations in Data ONTAP® 8.1 that will enable customers to achieve an agile data infrastructure environment to cope with their dynamic business requirements. We continue to deliver on multiple fronts, advancing our technology and partnerships. With our best-of-breed partnering strategy and ongoing innovation-led solutions, we enable our customers to scale their business without limits.

Without question, NetApp along with 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 that until recently investors had made up their minds regarding which of the two presents the better value.

For NetApp, since reaching a high on the year of $46.80 on April 3, the stock was down as much as 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.

Nonetheless, for as much as I appreciate EMC's business and what it has been able to accomplish, from my vantage point, NetApp had become a bit more intriguing if for no other reason than the options that its valuation had presented -- not the least of which was having become a potential target of Cisco and Oracle, two enterprise giants looking to leverage their competitive advantages.

However, since then the stock has risen almost 20%, reaching a short-term high of $33.37. It seems investors have focused on the company's numbers, showing single-digit organic growth and effective competition against both EMC and IBM ( IBM) in sales of its high-end systems.

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 now going on at NetApp. Though there are yet many questions to be answered.

Will Wall Street ever be satisfied with what will certainly result in shrinking margins in order to increase sales as the cloud takes shape? Or more appropriately, can the market support both EMC and NetApp -- for that matter, even IBM?

What is clear is that NetApp has no intentions of making this decision easy. Also it seems it cares very little about having priced itself out of M&A contention. Who knows, maybe it has actually made itself more attractive.

At the time of publication, the author held no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.