Semiconductors are in the doldrums; the PC market seems to be on life support; and the health of routers and switches seems to depend on whichever company reported last. Storage, though, is clearly an area of strength, as companies struggle to stay on top of their own data management and cloud computing demands ever-increasing hardware support.

TUTORIAL: Top Stock-Picking Strategies

That is good news for NetApp (Nasdaq:NTAP). This storage company seems to get dismissed from time to time as a weak sister to EMC (NYSE:EMC), but the fact remains that it is a growing player in a growing market with its own independent strategy and an architecture approach that some customers seem to prefer.

Is the Fourth Quarter a Return to Beat-and-Raise?
NetApp had a little hiccup with its last quarter, but the company seems to have gotten back on track. Revenue rose 22% this quarter, and the $1.43 billion in reported sales surpassed even the high end of the range. Investors should realize, though, that the company had to change its revenue recognition policies and that boosted revenue such that actual "apples to apples" results were closer to the expected level.

Still, product revenue did increase more than 26%. NetApp reported solid growth in both its mid-range and high-end business, as unit shipments rose 51% and 64% respectively. Although some of this growth was probably catch-up sales for business that could be closed in the prior quarter (due to component shortages), it seems pretty safe to conclude that there is strong underlying demand for NetApp's systems.

Profitability also improved with the higher sales. Gross margin improved more than a full point, and operating income rose 23%. Operating income leverage was limited to some extent by higher sales and marketing expense.

Will the Latest Deal Go Better?
In contrast to EMC, NetApp has a somewhat dicey history with acquisitions. Nevertheless, the company went ahead and spent nearly $500 million for LSI's (NYSE:LSI) external storage business, Engenio. The company does not believe there will be any problems with a fragmented architecture, but then they would be expected to say that (imagine the furor from shareholders if the company announced that the deal would make life worse for customers ...). Then again, the current CEO of NetApp used to run Engenio, so that should improve the integration prospects.

Apart from adding a business that the CEO is already very familiar with, Engenio should expand the company's opportunity in video and high-performance applications, as well as boosting its public sector business. Engenio isn't as high-end as Hewlett-Packard's (NYSE:HPQ) 3PAR or EMC's Isilon, but that shouldn't be a problem as NetApp tends to compete more effectively in the mid-range markets anyway. On top of that, it will be interesting to see if Oracle (Nasdaq:ORCL) will continue to use Engenio now that it is owned by a rival.

Room for More Than One
To some extent, the argument about NetApp's unified architecture and EMC's more fragmented offerings is pointless. Clearly customers have their preferences, and there isn't going to be one approach that pleases everyone. At the same time, it is interesting to see that EMC is migrating a bit towards the NetApp approach (with the VNX line), while NetApp is becoming a little more like EMC with the Enginio deal.

What's more, NetApp has plenty of other rivals from which to grab market share. HP and Dell (Nasdaq:DELL) still have a lot to prove and IBM (NYSE:IBM) and Oracle are not as singularly focused on the storage market.

The Bottom Line
If EMC is serious about gaining back share in the mid-range market, that is a risk that NetApp cannot ignore. Nevertheless, storage is an attractive market right now, and there's room for more than one double-digit grower. EMC looks like a better value today, but not overwhelmingly so, and NetApp offers more growth potential. Both are worth a look and more aggressive investors may find NetApp the more interesting option. (For related reading, also take a look at NetApp Down But Far From Out.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center