2 Key Observations for NetApp Investors

It has been a rough stretch for NetApp shareholders, but a new product could be the start of a much-needed change.

Jul 7, 2014 at 8:30PM

In a recent report, Barron's was the latest firm to recognize the investment value of NetApp (NASDAQ:NTAP). Until recently, the company's challenges in connection with EMC (NYSE:EMC) and International Business Machines (NYSE:IBM) have spooked Wall Street. Yet, as NetApp's investment value becomes realized, Barron's makes two key points regarding FlashRay and NetApp's hiring practices that could be telling for the future.

Weathering the storm
In recent months, NetApp has had to overcome challenges that many on Wall Street thought could cripple the company. Most notably, margins have been a concern. NetApp is the second-largest disk storage company by market share, behind EMC and before IBM, thus creating competitive concerns.

Yet, during the last quarter, NetApp was the only company of the three noted that actually gained market share in external and internal disk storage systems, a market that generated $7.3 billion. NetApp's market share grew 50 basis points to 11.7%, thereby answering fears regarding competitive pressure just fine.

The second big fear came after IBM announced that it would no longer be one of NetApp's storage hardware vendors.  IBM chose to focus on its hardware in hopes of driving growth in a segment with revenue that had fallen at a 20%-plus clip in recent quarters.

Therefore, NetApp's segment that manufactures company-specific equipment saw a 34% year-over-year loss in revenue during the last quarter. Albeit, since this business accounts for only 7% of NetApp's total revenue, the company has been fine with its high-margin disk storage business performing well.

Now its time to grow
With all things considered, NetApp has weathered a potentially dangerous storm quite nicely and is now looking to grow from the ground up. Barron's made an important observation in its recent research report, noting a 22% increase in the company's job listings, which follows job cuts of 1,500 of NetApp's 12,600 employees last year. 

But, with the disk storage space remaining challenged, and the company losing revenue from the IBM ordeal, why hire so aggressively? The answer may lie in its flash storage initiative, called FlashRay, a product that will launch later this year.


Source: The Register

FlashRay is a storage technology built from the ground up using NetApp's own technology, manufacturing, and research. This is a product believed to have 20 times better performance than traditional hard disk drive storage systems, with integrated file and volume management, complete data management, and application integration features.

NetApp won't be the first large company in its industry with a flash storage array, but FlashRay will finally give the company a product in high demand, where it has otherwise lacked presence. Due to the fact that flash storage arrays are not actual disks and have increased performance incentives for large enterprise customers, many believe that FlashRay could catapult revenue for NetApp in a short period of time.

Why FlashRay is different?
NetApp's lack of a fresh flash product has been a key concern of bears, as both IBM and EMC quickly acquired start-ups with flash technologies, which are already available in the open market. Yet, despite lacking this important element to the storage space, NetApp has remained competitive, notably growing its overall market share, while EMC and IBM have lost share.

Moreover, the fact that NetApp has taken its time to build FlashRay might actually work in its favor. For example, EMC's acquisition of XtremIO last year quickly made the company's all-flash system No. 1 in the market due to synergies with its other products. However, FlashRay is unique because it is its own operating system, which brings together all facets of flash storage with the company's existing storage technologies.

NetApp's former Vice President, Brian Pawlowski, explained the reason for in-house development of FlashRay very well. He said that acquired flash technologies might have scale-out capabilities, but could lack management integration when combined with an existing network of storage products. But, since FlashRay was built from the ground up with NetApp's existing products in mind, the flash service will have the capability for complete synergies with added benefits that cannot be created with acquired technology.

Foolish thoughts
Despite being late to the party, a fully integrated FlashRay gives NetApp a distinct advantage in the flash space. Investors should like the company's chances to steal even more market share from the likes of EMC and IBM, as its FlashRay initiative becomes a real product for enterprise customers. Moreover, the high expectations might provide reason for the recent hiring spree, and imply that a FlashRay launch is on the horizon. All of these are good signs for a stock trading at just 11.4 times forward earnings.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool owns shares of EMC and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jun 12, 2015 at 5:01PM

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