Why It's Time To Buy NetApp

NEW YORK ( TheStreet) -- It has been a seesaw type of a year for big data giant NetApp ( NTAP). Since reaching its year-high of $46.80 on April 3, the stock has lost as much as 40%. This is despite what has been some solid performances relative to published estimates.

It seems investors have become concerned about the company's prospects, or more specifically, how will it fare against rivals such as IBM ( IBM) and EMC ( EMC). Of late, it would seem that investors have favored EMC. However, NetApp has done more than hold its own in these battles.

For that matter, the two giants have traded neck and neck over the past couple of years. The question is what does the future hold. It also doesn't help that NetApp sports a valuation that is much higher than Dell ( DELL) and Hewlett-Packard ( HPQ). But NetApp does not have their growth problems either.

Still, investors have begun to worry that increased competition and margin pressure will stall the company's ability to grow into its valuation. This is especially since its business is heavily reliant upon enterprise IT spending, which this year has been abysmal. On the other hand, investors should find it encouraging that the company was able to deliver a solid second quarter. But was it enough?

For the period ending October, NetApp reported net income of $236 million, or 63 cents per share, on revenue of $1.54 billion. Revenue increased 2% year over year and improved by 7% sequentially. These are certainly not numbers to write home about, but in this market, in-line results are always welcomed -- especially since bad news is always around the corner.

Likewise, profitability was a plus. The company improved gross margins sequentially by half of a point. Although the year-over-year comparison showed a one-point decline, I'm willing to give the company a pass on this because of the significant sequential improvements in operating margins which was up 54%. This means the company is doing well managing costs.

On the other hand, I do wonder how long can it keep costs down and still make investments in areas to grow. As noted, competition remains an issue for investors. If NetApp is unable to distinguish itself in ways that impresses the Street, there is a chance that its valuation may come under pressure.

In that regard, I can't imagine NetApp remaining an independent company much longer. On a similar note, as the "the cloud" starts to form and businesses begin to fully embrace migration benefits, it's hard to envision a company such as Cisco ( CSCO) ignoring NetApp's value and making a bid for the company. Cisco, which has been on a shopping spree of late, has enough cash to make this deal happen tomorrow.

Plus, with so much competition for big data, NetApp will have a considerable amount of value to companies that want to leverage their enterprise presence and become one-stop shops. From that standpoint, investors can't rule out a name like Oracle ( ORCL) from stepping in and making a bid. After all, NetApp is "big data" and Oracle is "data analytics" - it makes too much sense.

Bottom Line

Since reaching a recent low of $26, NetApp stock is up 25%. This means that although there are a lot of questions that need to be answered with NetApp, it seems the Street is still willing to give the company the benefit of the doubt.

With enterprise spending expected to rebound in 2013, there will be opportunities for NetApp to prove that its current valuation today is a steal. But then it might be too late, which means now is the time to buy.

At the time of publication the author had 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.