NetApp's Storing Confidence Ahead of Earnings

NEW YORK (TheStreet) -- I've never been the type to boast about value for stocks that are trading at or near their 52-week highs, but in the case of NetApp (NTAP), I'm willing to make an exception.

What the Street has begun to realize is that even though NetApp has often played second fiddle to market leader EMC ( EMC), the storage market is still up for grabs. With industry experts projecting that market to grow by close to 200% over the next three years, logic says that NetApp should do well even if the company remains in second place. But don't confuse that for complacency. If my suspicions are correct, this company has much bigger ambitions.

NetApp will report fiscal first-quarter results on Wednesday after the market close. When the company announced year-end results in May, management guided revenue to come in the range of $1.47 billion to $1.57 billion, which suggests year-over-year growth of close to 6%. Management also projected non-GAAP gross margin to be up 1% sequentially, while non-GAAP operating margin is projected in the range of 13.5% to 14%, up 1.5% to 2%, sequentially.

These numbers seem a bit conservative, which suggests that management doesn't expect enterprise spending to pick up much as analysts have projected for the second half of the year. Even so, I expect NetApp's results to arrive on the high end of its guidance, if not exceed it. Let's recall that in the May quarter, even though revenue was up just 1% year over year, management still figured out a way to beat expectations while growing revenue 5% sequentially.

That was an indicator that business was beginning to pick up, especially since the company's higher margin service revenue grew 8%, which helped offset weakness in the product business.

NetApp bears were quick to point out EMC outperformed in the recent quarter. Well, that's true. I'm not going to debate that. In EMC's case, that's what a market leader is expected to do. But we need to keep things in perspective.

Take Hewlett-Packard ( HPQ) for instance, whose storage business consists of what is called "converged and traditional" storage. But HP has not figured out a way to grow that business, which recently lost 13% year over year. So when looking at NetApp's market position, the good news here is that while the absolute numbers may not inspire much confidence at first glance, on a relative basis it's clear NetApp is still growing market share. I don't expect anything different in Wednesday's first-quarter results.

We can pound the table and discuss revenue growth and market share all we want. But let's not discount that this is still a very profitable business. It was no accident that management was able to advance gross margin in the May quarter by 170 basis points to reach 60.1%. This led to a net income of $253 million, which grew 4% year over year. Essentially, management knows its products and understands what it takes to drive cash flow.

To that end, given that the total available market for Big Data is projected to grow to as high as $17 billion by 2016, I believe that investors should get in on this stock now since it is just at the cusp of its growth spurt. The current market now stands at just $6 billion.

What's more, Given NetApp's strength in Fabric-Attached Storage and its E-series line of products, the company's excellent strategy and design will continue to appeal to the enterprise.

Along those lines, while enterprise spending has been soft in the first half of the year, I don't believe that businesses can afford to starve themselves for very long -- not if they want to stay in the game. I don't believe CIOs of these companies care about managing their own data storage. I expected NetApp to see a significant chunk of this business.

Accordingly, I would be a buyer here ahead of earnings. On the basis of free-cash-flow growth and margins, I expect this stock will be at $50 by the end of the year.

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 co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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