Revenue growth and higher profits have been hard to come by for data storage specialist NetApp (NTAP - Get Report) . Not only has the Sunnyvale, Calif., enterprise giant missed Wall Street's revenue targets in three of the last four quarters, it has missed earnings twice during that span. And in the one quarter where revenue did exceed analysts' estimates, it still declined more than 10%.
NetApp reports its second-quarter fiscal 2016 results after the closing bell Wednesday. Owing to its fundamental struggles, the stock has gotten crushed in 2015, falling some 24%, including an 11% decline in the past six months. But over the past three months, however, NTAP stock has seen a bit of an uptick, climbing almost 3%. It's not a huge move, but it's been enough to beat both the Dow Jones Industrial Average (DJI) and the S&P 500 (SPX) index.
Why the recent interest in NTAP stock? Last month, Dell agreed to acquire NetApp's larger rival, EMC (EMC) , the market leader in enterprise data storage. The estimated $67 billion dollar deal for EMC -- which, if it closes, will be the largest tech deal of all time -- would also give Dell full control of software virtualization specialist VMware (WMW) , which was 80% owned by EMC.
EMC stock -- down 15% on the year -- barely budged on the announcement. EMC shares are trading more than 6% below their June high, in fact. Nonetheless, it would seem the rising interest in NetApp is based on they idea that a buyout offer for it might be next. And with NetApp still trading at near 52-week lows, I could see why a Dell competitor would consider buying it. But beyond the cheap price, NetApp wouldn't create much value.
Enterprise data storage -- the management of corporate information in large cloud environments -- remains a strong growth industry. But NetApp -- as evidenced by its revenue trends -- has not shown it can capture any significant share of the market. With NetApp's revenue for the just-ended quarter and full-year projected to be down 7% and 5.3%, respectively, where would the value be in a deal?
Based on fiscal 2017 revenue estimates of $5.86 billion, revenue is projected to grow at just 1%. And that's assuming an EMC/Dell union doesn't put additional pricing pressure on NetApp, which already trails EMC in quarterly operating margin by five percentage points. Not to mention, with Dell already having an advantage in the realm of servers, its has enough firepower to bundle services, which increases its margins, while growing storage market share at the same time.
Given these factors, any small stock gains NetApp is enjoying currently will likely be short-lived. Investors should take profits now and move on to the next good idea.