Despite Strong Sector Performance - We Still Don’t Think NetApp (Nasdaq:NTAP) is Compelling
Posted: 10 June 2008 12:59 PM   [ Ignore ]  
Total Posts:  47
Joined  2008-05-06

June 10, 2008 – IDC reported relative strength in the storage software segment yesterday with the segment now posting 18 consecutive quarters of year-over-year growth and revenues of $2.9 billion, up 9.4% Y/Y. We took a closer look at the report and the companies trading in the sector, with NetApp (Nasdaq:NTAP) jumping out as the clear outperformer in terms of Y/Y growth at 21%. The closest to NTAP in terms of Y/Y growth was Symantec Corp. (Nasdaq:SYMC).

So we decided to take a closer look at NTAP to determine whether this is a good time to buy. The first thing we noticed was that, at $23.73 the stock is trading closer to its 52-week low ($19.00) than its 52-week high ($33.84). The reason for this lies in the fact (a) that the company’s recent guidance for the current quarters came in below expectations and (b) it is planning on selling $1.1 billion in convertible notes, which will be convertible creating additional potential dilution to existing shareholders. The conversion price was set at $31.85 per share, a 34% premium to today’s price.

We don’t see the conversion as being a particular disincentive to purchasing the stock due to the fact that, based on the company’s annual guidance this year, we would forecast a target trading range between $27 to $29, only about 15% to 22% above current levels. So, if the stock happened to trade up to levels that encouraged conversion, we would consider that a good thing in the near term. The problem is that it doesn’t appear to be likely in the next quarter or so, and we think there are other places to invest that look more attractive in the near term.
The company’s revenue guidance for this upcoming quarter is about 8% below last quarter’s results. There appears to be something that happens to NTAP in the Q1 each year that results in a sequential decline over the Q4. Last year’s Q1 result was a 14% decline Y/Y. Something to think about, the Q2 result for last year was its best, on a sequential basis, in terms of revenue growth.

So, if there is a time to invest in NTAP, then it looks like the period heading into the Q2 release, closer to the first week of December will make the most sense. Perhaps between now and then NTAP’s stock may drift a bit more which could build more upside into the stock. That overhang at $31 though is pretty depressing. We would be buyers of this stock anywhere under $20, but not until then.

Disclosure Note: SCPEditor does not have any position in NTAP