Mr. Market doesn't love storage-systems firm NetApp
Since the timid first-quarter report three months ago, NetApp shares have dropped more than 20%. Meanwhile, every major rival in the space has beaten this stock: EMC
The swoon includes another steep drop on the heels of second-quarter results, wherein NetApp beat earnings estimates but missed the Street's revenue targets. Haircuts happen, but you rarely see solid earnings overshadowed by a revenue miss.
In this case, the fall is especially puzzling. NetApp CFO Steven Gomo explained that the revenue shortfall was due to slow orders from just nine of the company's 46 largest accounts.
When the back story is that specific, you'd expect to learn more about what happened to these errant accounts, but no luck on that front. Analysts jabbed at that question from various angles, only to be reassured that most or all of the soft orders should bounce back in the coming quarter. With the federal budget opera in full swing during the quarter, maybe Uncle Sam might be to blame? But no -- budget flushing in federal accounts produced a very strong Public Sector quarter for NetApp.
It's not even a case of losing market share to competitors, according to Thomas Georgens. The way the CEO explained it, NetApp's product revenue grew more in this quarter than EMC's comparable division did in the past six months. Hence, market share should be expanding and not contracting.
So what we have here is a failure to communicate. At the end of this report, investors are no wiser about what's really troubling NetApp than we were the week before. Meanwhile, profit margins and growth rates are dwindling across the board.
If Georgens and his merry band get their act together and start executing, we should see great returns on shares bought at today's low prices. But it's an uphill struggle; NetApp may be outgrowing EMC, but the larger company is a well-oiled machine with top-shelf management. NetApp has a lot to prove at this point.
The company does tap its tendrils into the red-hot cloud-computing market -- but then again, EMC gets even closer by dint of its majority ownership in virtual-computing pioneer VMware
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