NetApp Shares Slump On Weak Profit View Amid Supply Shortages

NetApp Inc. (NTAP) shares fell Thursday after the data-storage company offered a tepid earnings outlook due to supply constraints and said it would ramp up spending to keep pace with demand.

The Sunnyvale, Calif., company's revenue has surged in recent quarters as companies continue to invest in new ways to store and access mounting troves of documents and media.

But the cautious forecast combined with plans for increased investment, which could pressure margins, prompted a slew of downgrades from Wall Street analysts, who are primarily concerned with the stock's valuation amid its big rally over the last year.

NetApp shares, which have gained more than 80% from their 52-week low hit last February, were recently down 9.45% at $53.01. NetApp was the worst performer in the Standard & Poor's 500-stock index. Thursday's declines erased all of the stock's gains in 2011.

"Despite any number of intermediate term macroeconomic concerns, as long as we continue to gain share and outgrow the market, we intend to continue to spend aggressively to make the most of our opportunity," NetApp Chief Executive Tom Georgens said late Wednesday on a conference call with analysts.

Late Wednesday, NetApp reported its fiscal third-quarter earnings jumped 60%, but revenue was hurt by component shortages. The company sees the problem continuing in the current quarter as it issued a fiscal fourth-quarter profit outlook that fell below analysts' projections, according to Thomson Reuters.

Piper Jaffray analyst Troy Jensen said NetApp's "aggressive" spending strategy is an appropriate long-term approach to growth and capturing market share, but could hinder the stock in the near term.

"While in theory the investment behind sales is a long-term positive, we believe it affords NetApp little bottom line flexibility should sales fail to materialize," said Jensen, who downgraded his investment rating on NetApp to neutral from overweight. "We believe there is a high near-term probability of a pause for the stock."

NetApp shares trade at roughly 26 times expected earnings, according to FactSet Research, which is considerably more expensive than its peers. The company is facing increasing competition as larger rivals like Dell Inc. (DELL), EMC Corp. (EMC) and International Business Machines Corp. (IBM) have made acquisitions to boost their data-storage offerings. All three of those stocks trade at cheaper valuations than NetApp.

Citigroup analyst Richard Gardner slashed his rating on NetApp to hold from buy, primarily due to valuation. He expressed concern over increasing competition as EMC's entry into the mid-range storage market "could flatten NetApp's share gain trajectory somewhat during the coming year."

Other market observers remained optimistic about NetApp's prospects. Wunderlich Securities analyst Brian Freed said the fact that the company's conservative profit outlook was due to product delivery timing and revenue recognition rather than a lack of demand is a positive for its growth prospects.

"We believe the strong demand for these products attests to NetApp's technology leadership in the segment and portends long-term revenue growth and market share gains," Freed said. "We view any weakness resulting from the third-quarter report as a buying opportunity."

Collins Stewart analyst Louis Miscioscia, who has a buy rating on NetApp shares, expects the stock to bounce back after disappointing results, similar to recent action from F5 Networks Inc. (FFIV), Equinix Inc. (EQIX) and VMWare Inc. (VMW) after they reported earnings.

"We would not expect NetApp's shares to stay down for long," he said.

-By Steven Russolillo, Dow Jones Newswires; 212-416-2180; steven.russolillo@dowjones.com

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