Updated from 10:34 a.m. EST

Shares of

Network Appliance

(NTAP) - Get Report

approached a four-year high Wednesday on the strength of strong second-quarter sales and a surprising jump in margins.

In recent trading, the stock was up $4.21, or nearly 17%, to $29.23, nearly $3 higher than its previous 52-week high, and close to the heights of May 2001 when it hit $29.50.

The Sunnyvale, Calif., vendor of storage networking gear boosted second-quarter revenue by 36%, year over year, and beat Wall Street's earnings expectations by 2 cents a share, the company announced after the close Tuesday.

Operating margins were up sharply year over year, from 14.5% to 17.6%, gross margins increased to 61.8% from 60.4% and guidance for the next quarter was better than expected.

Net income increased by 14% year over year to $55.3 million, according to generally accepted accounting principles, on sales of $375.2 million.

Excluding items, NetApp, as the company is generally called, earned a profit of 16 cents a share. Analysts polled by Thomson First Call were expecting a profit of 14 cents a share on sales of $377.25 million.

Looking ahead, the company said that it expects revenue in the third quarter to increase year over year by 35% to 38% (roughly $394.6 million to $403.4 million) and that pro forma earnings will be 15 cents or 16 cents a share. Wall Street was expecting 15 cents a share on sales of $395.2 million.

"NetApp achieved strong growth across all product lines, segments, and geographies," Dan Warmenhoven, the company CEO, said in a statement.

Since mid-August, NetApp's shares have had a great run, appreciating 54% as of Monday. In fact, all of the major players in the enterprise storage sector also have done well, with

Brocade

(BRCD)

gaining 73%,

QLogic

(QLGC)

61% and

EMC

(EMC)

38%.

In the days before the announcement, a number of analysts wondered if NetApp had gotten too expensive. But "at the end of the day estimates are still moving significantly higher and valuation was not nearly as big of a stretch as it appeared," Goldman Sachs analyst Laura Conigliaro said in a morning-after note to clients.

" As for valuation, a 35X multiple on our new CY05 EPS estimate of $0.74 would imply a fair value of $26, but with solid cash flow and the Street likely to bake-in expectations for further upside to numbers we expect the stock to trade higher ahead of the

December 1 analyst day and then more gradually continue its climb into 2005," she added. (Goldman has an investment banking relationship with Network Appliance.)

However, Conigliaro and other analysts noted that only about one-third of the gross margin upside is recurring in nature and as a result the company now targets January quarter gross margin to be in the 60.5%-60.8% range.