NetApp Has Gone As Far As It Can Go

NEW YORK (TheStreet) -- Since peaking at $45.85 in January, shares of storage giant NetApp (NTAP) have dropped as much as 27%. Since then, the stock has rebounded slightly by 4%.

But at the current price of around $36, shares are still down 13% for the year to date. The company needed a solid beat in its fiscal fourth-quarter report and strong guidance to get investors to believe. It fell short in both areas Wednesday.

Although the shares weren't punished, there are signs that management has taken this company as far as it can go. I just don't believe the Street will reward NetAppwith a higher share price anytime soon. 

With better-than-expected results coming out from enterprise giants like Cisco (CSCO) and Rackspace (RAX), NetApp's relative performance underwhelmed with revenue of $1.65 billion. Aside from the 4% year-over-year decline, revenue missed average estimates by more than 1%.

As have been the case for the past couple of quarters, NetApp is struggling to preserve its position against market leader EMC (EMC). Revenue from NetApp's original equipment manufacturers are now in decline, falling 34% this quarter.

Product revenue, which accounts for 63% of total revenue, fell more than 8% to $1.04 billion. This was offset by 7.7% increase in the service business. But that business is only one-third the size of the product segment. Software Entitlement & Maintenance, which accounts for 14.0% of total revenue, increased less-than half of a percent to $227.5 million.

Profits were also a mixed bag. Although adjusted earnings of 70 cents per share represent a year-over-year increase of 27%, the Street was expecting more (79 cents). And this goes back to the premise of whether NetApp has reached its full potential.

Although no one is going to debate whether NetApp is a great business, the company has never truly satisfied investors' thirst for growth. Even at the height of the "all things Big Data" craze of two years ago, NetApp still left the Street hungry for more. This is even though NetApp is second only to EMC in the storage space. So this quarter sounds very familiar. But it's not all bad news. Management has not forgotten how to lead.

Adjusted gross margins expanded 310 basis points year-over-year to 64.1%. Management figured out ways to squeeze extra profits from both product gross margins and service gross margins. But to what extent does the margin improvement present value? This is what the Street is weighing.

Consider, even with NetApp's year-to-date stock delicate of 13%, this now places the company's shares on even valuation metrics with EMC. Both trade at P/Es of 20. So why not go with the company with the largest share and bringing in higher earnings? Unfortunately, that's the predicament in which NetApp finds itself.

Absent clear differentiation between its products and those from EMC, it makes little sense to buy the stock at this point. Complicating matters is the fact that the market for storage is no longer as attractive as it use to be.

To that end, I see NetApp as a prime acquisition target for a company like IBM (IBM) or Hewlett-Packard (HPQ), which for some time have underperformed in that area, particularly at the hands of NetApp.

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. I just don't believe the Street will reward NetApp with a higher share price any time soon.

So if given a choice to buy NetApp or the market leader EMC, it's not a hard decision.

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


This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

>>Read more: Netflix Has an Enormous Opportunity Sitting in Front of It

More from Opinion

AAP Exclusive: Cramer Says The President is No Longer on the Side of the Bulls

AAP Exclusive: Cramer Says The President is No Longer on the Side of the Bulls

Why It Makes Perfect Sense for Netflix and Amazon to Buy Up Movie Theaters

Why It Makes Perfect Sense for Netflix and Amazon to Buy Up Movie Theaters

2 More Reasons to Sell All Your Stocks and Run Away

2 More Reasons to Sell All Your Stocks and Run Away

Sean Hannity's Link to Trump Lawyer Raises Questions: Doug Kass Insider

Sean Hannity's Link to Trump Lawyer Raises Questions: Doug Kass Insider

Netflix Blowout Earnings Remind Investors of One Thing: This Company Is a Beast

Netflix Blowout Earnings Remind Investors of One Thing: This Company Is a Beast