NetApp, Under Siege, Skids Another 9%

Latest woe: EMC's new storage system soon to hit market.
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Stock in

Network Appliance

(NTAP) - Get Report

continued its protracted, sharp retrenchment Tuesday, falling 9.3% amid fears about growing competition in the company's networked storage business.

The bubble of hyperenthusiasm that had made NetApp one of the

Nasdaq's

highest fliers was officially popped last week when the law of large numbers finally caught up with the company. NetApp told analysts on its fiscal first-quarter earnings conference call that revenue growth and profit margins likely would start declining from their previous intergalactic levels. The stock fell about 20% on that news.

Brutal
NetApp stock getting crushed

But in the meantime, worries over the imminent release of a new midrange network-attached storage, or NAS, product by

EMC

(EMC)

have been keeping the pressure on NetApp stock. EMC hasn't set an official release date yet for the product, code-named

Chameleon

, but the thinking on Wall Street is that it could be on the market before the end of the year.

EMC has come to dominate the enterprise storage industry on the basis of the server-attached storage, or SAS, model. In that model, storage devices are attached directly to the servers that run applications for a network's workstations. NAS puts those storage devices directly on the network, helping to ease bottlenecks and letting information technology managers more easily add new capacity.

Most analysts forecast that NAS sales will grow at a compounded annual rate somewhere north of 60% through 2003, miles above what anyone hopes the old SAS model will yield. Sensing that opportunity, EMC has already gotten a foothold in the NAS market with its high-end

Celerra

offering.

Thus far, Celerra's hefty price tag -- around $250,000 for starters -- has kept its salespeople from banging heads with those of NAS leader NetApp, whose products address the midrange market. But Chameleon, which will likely sell for between $100,000 and $125,000, could change that.

"NetApp has faced minimal competition so far," says David Bailey, an analyst at

Gerard Klauer Mattison

. "But in the past six months,

Compaq

(CPQ)

and

Dell

(DELL) - Get Report

have entered with low-end offerings, and now EMC is coming out with an offering more comparable to what NetApp has. In the best case, that increases the pricing and margin pressures. In the worst case, EMC could take some market share in the long term." (GKM hasn't done underwriting for any of those companies.)

That's not reassuring to investors hoping to see NetApp regain the 58% it's lost in the past month.