This Underfollowed Hardware Guru Will Shock the Street This Week


At the start of 2011, storage expert NetApp (NAS: NTAP) looked like a credible threat to industry giant EMC (NYS: EMC) . But EMC moved from strength to strength last year while NetApp struggled, and the gap has grown even larger in 2012. And it shows on the stock charts: Over the last 20 months, EMC has gained 13% while NetApp's shares took a 43% dive.

The smaller competitor reports first-quarter results after Wednesday's closing bell. Will NetApp prove the doubters wrong this time?

Well, there sure is a handful of doubters to impress. The Street's earnings consensus points to $0.38 per share, down from $0.55 a year ago. Sales are expected to stay absolutely flat at $1.46 billion. These figures are well within management's guidance ranges, though the bottom-line estimate skews a little high.

NetApp points to macroeconomic pressures as the main reason for its cautious sales guidance. Analyst firm Caris would add that NetApp's exposure to soft government budgets in Europe and America presents further headwinds, not to mention a lack of "identifiable catalysts" until at least 2014. And Cantor Fitzgerald sees "broadening softness" creeping into markets where NetApp has been strong. Both firms carry hold ratings on NetApp.

I did find a bull grazing in NetApp's backyard, though. UBS started covering the stock last week with a buy rating and a $45 price target, leaving room for a nearly 50% gain. The Swiss bank calls NetApp the "most focused" storage specialist and believes that investors have overreacted to bad news in recent months.

What should we make of these conflicting analyses? For one, I'm convinced that there's solid demand for very large storage systems like the ones EMC and NetApp sell. As for the competition, Hewlett-Packarddoesn't seem terribly interested in hardware sales under new CEO Meg Whitman and Oracle has squandered the storage assets it bought along with Sun Microsystems' Java platform. IBM remains a threat, but was always more focused on software and support services than commodity-like hardware components. So it's really up to EMC and NetApp to carve up this market between themselves.

So it comes down to execution on the front line. European shenanigans notwithstanding, I'd be shocked if NetApp didn't exceed its sales guidance this time, which by definition would also leave analysts flat-footed. The bottom line is murkier, given that NetApp might reinvest much of the surplus sales into R&D or marketing.

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