August 20, 2004
Sure, data storage doesn't have the sex appeal of, say, Google (Nasdaq: GOOG ) . But if you pick the right data storage company, it's hard not to get excited. Just look at Network Appliance (Nasdaq: NTAP ) . Its first-quarter figures knocked the socks off analysts' estimates with revenue of $358 million, up 37%, and profits of $50 million, up a whopping 73%. Not surprisingly, NetApp's shares have risen nearly 14% since the results were announced after the market's close Tuesday.
Experts say the $20 billion market for data storage systems is pretty much static. So, what explains NetApp's success in this boring market?
The answer: It's grabbing market share away from the computer hardware titans, IBM (NYSE: IBM ) , Hewlett-Packard (NYSE: HPQ ) , and Sun Microsystems (Nasdaq: SUNW ) . Clearly, corporate customers like NetApp's external data storage systems, connected by networks, more than traditional internal data storage devices attached to computer servers. The hardware incumbents aren't keeping up with NetApp's more versatile storage products.
Shifting preferences in data storage technology are rapidly putting the market into the hands of the NetApp and its bigger rival EMC (NYSE: EMC ) .
Even with EMC being the company to beat, NetApp is nicely positioned. Gross margins are well more than 60% and should stay that way. The company is concentrating not just on the boxes that store data, but also higher-margin software and solutions that help companies manage their data. NetApp has next to no debt and a healthy cushion of cash if needed.
Sure, the market is flat. Discretionary IT spending is long gone. But companies will still need to find more effective ways of coping with the volumes of data they produce every day. Unable to double their spending, companies will resort to better technology. NetApp will be a long-term beneficiary. The shares are still less than $20. Tuck some away.
Fool contributor Ben McClure hails from the Great White North. He doesn't own any companies mentioned here.