Network Appliance, Inc.
Valuating NTAP

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By dparkerson
January 25, 2001

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Davidsbo said:

"Currently NTAP is trading at ~$61/share, with P/E of ~320, it's Market Cap is ~20B, current EPS are ~$0.23. It's expected to grow earnings at ~48.2%/year for the next five years. [Link to Yahoo! Finance].  If NTAP performs well and meets these aggressive growth expectations, its EPS will be $1.65/shr. Its market cap will be greater than $140B (which is huge for this type of company).

"I am not questioning company's ability to create valuable products, quality of management and so on. I am just saying that buying NTAP at $61 is like buying Toyota Corolla at $50'000. You do get a good car, but the value you are getting is questionable. Am I missing something?"

Yes, Davidsbo, you are missing plenty and you're going to have to do better DD [due diligence] than Yahoo! Finance to get respect on this board. Contrary opinions are welcome, but unsubstantiated fear mongering is better reserved for the shorts on the Yahoo boards.

1. First of all, NTAP at today's $61 trades at 148x, NOT 320x earnings for the fiscal year ending this quarter. Current EPS estimate for this fiscal year is 0.41, NOT 0.23.

I'm sorry, but if you're using P/E's off of stock quotes, then you probably shouldn't be buying individual stocks at all. You will get burned by buying low trailing P/E stocks that have miserable futures;  thus the reason for their low P/E. Trust me, I've done it. The big money has assigned that low P/E for a reason.

2. Please don't assign NTAP a 5-yr growth rate of 48.2% after reading their research page on Yahoo. Look up projected NAS growth, or even storage sector growth. Compare it to NTAP's historical 100% plus growth rate, as well as Warmenhoven's own 70% rate of growth he advised at the last CC.

3. Fundamental valuation analysis will only take you so far in selecting stocks. With your type of analysis, you will own a portfolio full of INTC, AMAT, DELL, and WCOM, all with impressive numbers and PEG projections per their Yahoo! research pages, but their businesses are deteriorating. Trailing earnings growth will not earn you one single penny on your investments. The market is always 6 months ahead and you are rewarded for your company's future performance. The future of storage and NTAP's market share within storage certainly merit a higher valuation than your general tech stock.

Run your same numbers on JNPR and see how they come out. JNPR's Yahoo! projections make NTAP look like a bargain. Why is that? And why does every fund manager, who certainly has access to your same type of numbers, crave to own JNPR on every dip? I'll give you a hint: it's not mo-mo anymore. Any company who can steal big-time market share from the world's best-run company will be rewarded with a nice premium.

4. NTAP is the Mercedes Benz of NAS, period. LGTO, IBM, DELL, and CPQ would be the Storage Corollas of your analogy. NTAP has the best NAS product offering the best value to its customer, which is the reason for their maintained dominant market share. We're paying $50,000 for the Mercedes of storage, not the Corolla.

As an NTAP long for 2 years now, I welcome any contrary posts, any analyst's downgrades, or even any nay saying talking heads on CNBC in analyzing NTAP, as long as the information is factual. Nobody profits from cheerleading, or baseless fear mongering.

Just keeping it real.

Don Parkerson Jr.