There is a risk that investors and analysts are going to start viewing NetApp (Nasdaq:NTAP) less as an undervalued tech stock in an attractive market and more of a “cheap for a reason” underperformer that has gone about as far as it can against its major rival EMC (NYSE:EMC). I don't really share that view per se, but it's harder to argue for the bull case on NetApp when the company continues to leave the Street wanting more.
Not Getting Fiscal 2014 Off To A Great Start
With good results from EMC and better than expected results from Brocade (Nasdaq:BRCD), not to mention a host of sell-side vendor surveys, expectations were calling for a beat-and-raise quarter from NetApp. Instead, we got a pretty weak “make the quarter” (more or less), with a slight downward revision to guidance.
Revenue rose 5% from the year-ago level, but fell 12% sequentially. Product revenue rose 4% (and fell 18%), with NetApp's branded business notably strong (up 9% and down 13%). Although the company appears to be seeing strong ONTAP 8.2 adoption, it looks like NetApp's mid-range business is seeing more pressure from EMC and Engenio (the storage business acquired from LSI (NYSE:LSI)) continues to underwhelm. 
Margins were okay this quarter. Gross margin improved a bit from last year and held steady from the prior quarter. Operating income jumped 58% from last year, with non-GAAP margin almost hitting 15%.

SEE: A Look At Corporate Profit Margins
As mentioned, NetApp's guidance also left the Street wanting more. On one hand, I really don't want to make a big deal out of a $10 million change in revenue (relative to expectations) and a half-penny less of earnings per share. But the Street wanted, and expected, higher numbers and I think most tech investors realize how short-term and reactive the Street's thinking can be with tech company earnings/guidance.
A Two-Horse Race?
With each quarter, NetApp seems to put a little more distance between itself and other enterprise storage rivals like IBM (NYSE:IBM), Dell (Nasdaq:DELL), and Hewlett-Packard (NYSE:HPQ), even though those companies still account almost a third of the market. Although it is possible that one of these companies could reinvigorate its storage business (say by acquiring Fusion-io (NYSE:FIO) or Nimble), it seems relatively unlikely right now.
But I'm not sure how much ground NetApp will gain on EMC now that it has emerged as a prime rival. EMC's VNX mid-range series seems to be putting real pressure on NetApp and although some believe ONTAP 8.2 will give NetApp an edge in private clouds and that the company is well-positioned in software-defined storage, I think the results say that EMC is still more than holding its own.
Still A Good Place To Be
Although the enterprise hardware business may not be poised for quite as much of a rebound in the second half of 2013 as previously hoped, I'm not too worried about NetApp's long-term position. It is possible that enterprise customers have over-bought storage equipment and/or that migrations to PaaS offerings at Amazon (Nasdaq:AMZN) and Microsoft (Nasdaq:MSFT) will reduce demand, but I think those concerns are overstated by the bears. All in all, I still believe that storage is a good place to be, and though I think challenging EMC on all fronts is going to be difficult for NetApp, there's still plenty to be gained from further pummeling IBM, Dell, and HP.
The Bottom Line
It doesn't take particularly heroic assumptions to drive an interesting price target for NetApp. Forecasts of 5% revenue growth and 6% free cash flow growth support a target above $50, making NetApp shares look pretty attractive today. While the short-term nature of the market is a definite risk (as is the apparent trend for sell-side surveys to overstate the health/momentum of NetApp's business), I still believe that NetApp shares can be long-term winners.
Disclosure – At the time of writing, the author owned shares of EMC.

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