Fools, take note: "Great results" do not always translate into a great buying opportunity. Whenever a company's share price gets too far ahead of its fair value, even the smallest sign of a slowdown in growth can send the share price south.
That's what's happened to Network Appliance
Even so, it's hard to find fault with the Q3 numbers. Net income climbed 50% as demand for Network Appliance's data storage products drove top-line growth higher. Revenue for the quarter soared 39% to $412.7 million, up from $297.3 million in the previous year's quarter. Even better, Network Appliance kept pumping out plenty of free cash flow. It already boasts a hefty $900 million cash balance, and at its current rate of FCF generation, that balance could double to $1.8 billion by the end of 2007.
Network Appliance is benefiting from changes in data storage technology. It sill appears to be grabbing market share from the likes of IBM
Business fundamentals are great, and the stock is priced 12% lower than it was yesterday morning. But that doesn't mean it's a bargain. At $30.25, Network Appliance sports an enterprise value (EV) of $11.3 billion. Producing about $300 million in annual FCF, Network Appliance has an EV/FCF ratio of 36. If that doesn't convince you that the shares are pricey, consider this: It sells for more than five times 2005 estimated sales and 39 times expected 2005 earnings.
Back in August, I reckoned that the shares, trading at less than $20 then, were well worth owning. Indeed, investors who tucked away some Network Appliance will have plenty to cheer about -- even after yesterday's price drop. Those who didn't should still wait for a better price to come along.
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Fool contributor Ben McClure doesn't own shares of any companies mentioned in this article.