NetApp May Be Storing Disappointment

 | May 21, 2013 | 12:00 PM EDT
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After the close, storage vendor NetApp (NTAP) is expected to report its fiscal 2013 fourth quarter. Analysts anticipate earnings of $0.68 on revenue of $1.758 billion. Back in November, I didn't like the second quarter results. But it didn't matter as analysts rushed to upgrade the stock. The stock took off.

I basically argued:  Why bother with a tech company that can only produce 2% revenue growth? I mean the big quarter was the third quarter, when revenue grew a staggering 4.1%. The fourth quarter is expected to grow just 1.7%. If it weren't for the smoking-hot third-quarter performance, the year would have been a total loss. 

If the company hits the analyst estimates, fiscal revenue will be up a whole 2.2% to $6.3 billion. Net income will be down about 9.2% and earnings before interest taxes depreciation and amortization will be down 14.7%. Yuck!

Right now, business is tough in the storage world. On Monday, The Silicon Valley Business Journal reported rumors that the company would lay off some 1,200 people, or about 10% of its workforce. The Times of India said 300 people were just laid off at the company's India headquarters.  

 According to Gartner Research, EMC (EMC) has been consistently taking market share from NetApp. The market for "external controller-based" storage grew just 1.9% last year. Of the large vendors, EMC was the only share taker. In fact, according to Gartner, in 2012, EMC took 6.7 points of share from the likes of IBM (IBM), NTAP, Hitachi, HP (HPQ) and Dell (DELL). 

But market share losses do not explain everything. NetApp gets approximately 45% of its revenue from overseas and a large part of that comes from foreign governments. Imagine being the head of European government sales? (And you thought you hated your job?)

Since my last note, NTAP is up about 23%. Most of the appreciation has come from speculation that Elliott Capital Management would force the company into an acquisition. It's entirely possible that NetApp will announce the 1,200 layoffs coupled with a stock buyback tonight. If that happened, the news would push the shares towards $40. But absent a little financial engineering, I don't see how NetApp's shares can stay so high; NetApp shares may be storing up disappointment.

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