NetApp Building Cloud, Storage Capabilities, Value

NEW YORK ( TheStreet) -- There's often no prestige in being considered second best at what you do. But when your current market is expected to grow in demand by close to 200% over the next three years, "prestige" becomes overrated pretty quickly. This makes the prospects of NetApp ( NTAP) all the more interesting.

While this company plays second fiddle to market leader EMC ( EMC) in the realm of enterprise data storage and overall "Big Data", NetApp has been steadily building its storage/cloud capabilities while others such as IBM ( IBM) and Hewlett-Packard ( HPQ) have fallen off the grid. This means astute investors can still do well with second place. And if my suspicions are correct, the implications of "No. 2" may not matter for very long.

Revenue was up 1% in the most recent quarter, while growing 5% sequentially. While that wasn't up to the company's usual standard, it was still enough beat the low-end of management's guidance. Besides, NetApp wasn't significantly outperformed by EMC, which posted growth of only 3%. Product revenue was unusually weak, though -- falling 2% year over year. But this was offset by a better performance in service revenue, which grew 8%.

Also, to keep things in the proper perspective, HP's overall storage business, which consists of both converged and traditional storage, lost 13% year over year. But NetApp left no questions in terms of profitability. With the help of an improved product mix, non-GAAP gross margins advanced 170 basis points year over year to 60.1%, which led to a 4% increase in net income to $253 million.

This tells me that management has figured out ways to drive gross-margin expansion with a richer mix of products, which continues to accelerate cash flow. And as noted above, this is likely just the beginning of NetApp's growth, especially since the total available market for "Big Data" is projected to grow by as much as $17 billion over the next three years. The current market now stands at $6 billion.

To that end, fiscal 2014 first-quarter guidance seemed a tad conservative. Management expects revenue in the range of $1.47 billion to $1.57 billion, which suggests year-over-year growth of just 5.6%. NetApp expects non-GAAP gross margin to be up 1% sequentially, while non-GAAP operating margin is projected in the range of 13.5% to 14.0%, up 1.5% to 2% sequentially.

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