What happened
Shares of data storage specialist NetApp (NTAP 1.54%) fell as much as 13.8% lower on Thursday morning, following the company's second-quarter earnings release. By noon EST, the stock had recovered slightly to an 11.2% drop.
So what
The results themselves were not the problem. NetApp saw revenue rising 7% year over year to $1.52 billion, roughly in line with Wall Street's consensus estimate of $1.51 billion. On the bottom line, adjusted earnings jumped 31% higher to land at $1.06 per share. That was significantly above the Street view of $0.99 per share.
At first glance, guidance for the next quarter didn't sound any alarm bells, either. The revenue forecast of approximately $1.50 billion for the third quarter was right in line with the current analyst view, and the Street's earnings consensus of $1.12 per share matched the bottom end of management's guidance range.
However, when you dig deeper into the guidance figures, you'll find that the recent trend of rising gross margins might break in the third quarter. Beyond normal seasonal patterns, NetApp is selling more of its low-margin hardware products and less of the ultra-profitable support services.
Image source: Getty Images.
Now what
Don't cry for NetApp's investors. Despite today's sharp correction, the stock is still up by a market-crushing 71% over the last year. The market reaction to this obscure weakness looks a bit harsh, but it works out to NetApp investors locking in some profits after a strong run.
Analysts disagree on where this stock will go next, with some firms raising their target prices and others slashing them instead. Me, I like NetApp's way of embracing SSD storage solutions based on NAND memory chips, and the company's recent rise in enterprise-grade service deals is also encouraging for the long term. Moreover, the stock isn't even expensive at 17 times trailing earnings. I wouldn't be surprised to see it get back on its feet right away.
