NetApp Needs to Show Some Enterprise

NEW YORK (TheStreet) -- The past six months have not been too kind for enterprise storage giant NetApp (NTAP).

Since reaching a high of $46.80 on April 3, the stock has plummeted as much as 40%. Remarkably, this comes on the heels of the company reporting better-than-expected third-quarter earnings and offering an outlook in line with Wall Street expectations. So what's the problem?

It seems aside from the stiff competition from other storage rivals including EMC ( EMC), IBM ( IBM) and, to some extent, Hewlett-Packard ( HPQ), investors have also become fearful of NetApp's growth prospects, which are heavily predicated on the overall health of enterprise and government storage spending.

With such a prolonged weakness in that market, and with NetApp's recent share decline, are investors justified for having turned their backs on the stock? While the stock might now seem discounted by the sector's standards, can NetApp prove its value to investors?

For its fiscal 2013 first quarter, NetApp reported net income of $64 million, or 17 cents per share, on revenue of $1.445 billion, 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 expectations on earnings while meeting analysts' revenue forecasts.

While the company's report was far from horrible, it did leave some investors wondering if can it overcome weakness in storage spending.

Revenue actually declined by 1% from the previous year and 15% from the fourth quarter. This fact did not escape investors waiting for the sort of returns expected by a dominant cloud player. Margins were not any better. Though it improved from the fourth quarter, it gave up close to three points from the same period of a year ago.

Guidance for the second quarter was somewhat mixed. NetApp expects EPS to arrive at approximately 45 cents to 50 cents per share on revenue of $1.5 billion to $1.6 billion. Revenue projections would represent growth of 7% from the first quarter and roughly 3% annually. With low-single-digit growth projections, the company is guiding cautiously -- understandably so. But investors have grown impatient.

Can It Overcome The Competition?

Aside from its recent struggles with execution, NetApp must prove it can also distinguish itself from its competition, an area that has also been a source of concern for investors.

Its recent numbers, which have shown declining growth, suggest that investor concerns are correct. However, with data storage being a critical enterprise IT priority, I'd like to think that brighter days are ahead for NetApp if it is able to weather this storm. But it won't come easy.

Along with EMC, NetApp has to battle others, including HP, IBM and Dell ( DELL), all of which are gunning for the same market. Nonetheless, it is NetApp that is somehow perceived to be the loser. Consequently, it is being punished. Its stock has lost almost 40% since April while EMC, a rival it has been in a neck-and-neck race with it all year, goes unscathed. It seems investors have made up their minds that perhaps EMC is the safer bet in terms of revenue prospects in high-end systems.

While it is hard to dismiss EMC's brilliance in execution, it is equally difficult to ignore how discounted NetApp shares have become. I suppose investors are now torn between the two and feel the need to pick one over the other. That implies investors don't believe the market is able to support both companies.

Further complicating matters is that IBM, HP and even a name such as F5 ( FFIV), continue to jump into the enterprise pool.

Bottom Line

I like NetApp and I see it eventually being acquired by an enterprise player such as Cisco ( CSCO) or Oracle ( ORCL) -- even though the latter has come out recently and denied having any interest in such a move.

All that means is now is not a good time. But the advantages NetApp would offer to either Oracle or Cisco makes too much sense to ignore. NetApp stores data and Oracle specializes in data analytics. It doesn't get any better than that.

In the meantime, NetApp has a lot of work to do to convince investors they should believe in its prospects. Also, I wonder if it will be able to leverage its technology in such a way to get its growth back to the double digits.

If not, will Wall Street ever be satisfied with growth in the low single digits? I'm not betting the latter will ever become a reality. For now, while NetApp might be a decent hold. It needs a couple of beat-and-raise quarters in order to prove its value.

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

This article was written 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.

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