Last night's earnings report from NetApp (Nasdaq: NTAP ) turned some heads. Investors looked left, then right, and then back again, as they shook their heads to say "no, thanks" to the results and guidance on tap. The stock is another 6% cheaper today than it was yesterday.
There was nothing wrong with the numbers, per se, with earnings of $0.26 per share on $938 million in sales. That's 17% year-over-year revenue growth and 13% higher earnings per share, and the updated guidance points to 23%-27% revenue growth in the next quarter. That's accelerating sales despite a tough market environment.
The bad news was the short-term earnings forecast. To snag market share from storage-software leader EMC (NYSE: EMC ) and other rivals, such as Hewlett-Packard (NYSE: HPQ ) or Symantec (Nasdaq: SYMC ) , NetApp is on a hiring spree and plans to add between 500 and 600 professionals in the next quarter. Demand for networked storage is exploding as a result of the virtualization trend, and CEO Dan Warmenhoven says that "we must seize the opportunity now, and we are hiring sales people now while the opportunity is all around us."
Adding staff costs money, so the company is sacrificing short-term earnings in exchange for a long-range opportunity. The next quarterly profit is supposed to land at $0.20 to $0.23 per share, about even with last year. As long as virtual server specialist VMware (NYSE: VMW ) keeps growing like gangbusters, pulling the likes of Microsoft (Nasdaq: MSFT ) and Citrix Systems (Nasdaq: CTXS ) into the virtualization sector by force of the massive growth opportunities there, I don't see anything wrong with NetApp's strategy.
Just keep an eye on VMware, and if that company's sales growth ever hits a brick wall (analysts currently expect around 50% annual improvements), it might be time to get out of NetApp, too -- if that happens in the next couple of years, but that's far from a sure thing.
In the meantime, long-term investors can enjoy these discounted shares, thanks to short-term traders who don't like to focus beyond the next quarter or two.