Tickers in this Article: NTAP, EMC, IBM, DELL, HPQ
Few things feel as rewarding in the market as riding a hot beat-and-raise story. As corporate tech spending has rebounded sharply from the recession, storage technology provider NetApp (Nasdaq:NTAP) has been on a strong run of late. With an apparent pothole in the beat-and-raise story, though, will investors continue to hang on to this quality growth name, or will they abandon it in favor of a hotter table at the stock market casino?

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The Quarter That Was
For the most part, NetApp's fiscal third quarter came in as analysts thought it would. Revenue rose 25% from last year and 5% from last quarter, though a slowdown in the low-end and some supply constraints robbed the quarter of a little bit of its momentum. Still, the company has found that demand for the new FAS3200 has outstripped their ability to supply it, so that's a relatively good problem to have (at least so long as customers are willing to wait).

On the profitability side, performance was a little more mixed but still solid. Gross margin rose more than a full point from last year, but fell 143 basis points from the prior quarter and equipment margins were slightly disappointing. Operating margin offered a similarly mixed picture, as the year-on-year improvement was solid but there was sequential softness. Still, the company delivered GAAP operating income growth of over 50%, so that is hardly a poor performance. (For more, see Analyzing Operating Margins.)

All of that said, guidance is what likely will matter most in the immediate aftermath of earnings. More to the point, management's view of revenue was in line with the preexisting average, but earnings guidance was a bit low. Given that this name has been popular with beat-and-raise momentum investors, that guidance readjustment is going to have some institutions cashing out and moving on - taking the stock down with it.

The Road Ahead
Investors who have watched the storage market for a long while now may feel that the NetApp story is familiar. More than a decade ago, it was EMC (NYSE:EMC) that was the plucky growth company taking share away from the entrenched players (most notably IBM (NYSE:IBM)). NetApp has likewise seen a solid growth trajectory, even though EMC is arguably a more responsive and innovative entrenched leader than IBM was in the earlier version of the story.

After this quarter, there is likely to be some fear that the upward revision and margin expansion story is over for NetApp. That is always a threat, but it does not seem like an especially likely problem just yet. True, the company may ultimately suffer for seeing EMC buy Isilon, but it is not as though NetApp has no technology or R&D of it is own. Likewise, while data storage acquisitions made by Dell (Nasdaq:DELL) and Hewlett-Packard (NYSE:HPQ) will make them more formidable, NetApp is neither helpless nor standing still. (For more, see The Data Storage Gold Rush - Who's Left?)

The Bottom Line
NetApp is a quality name and the growth potential for the storage market seems to be significant. That is not exactly lost on the market, though, and even with the correction in the stock price after earnings, the shares are not screamingly cheap. That said, the shares do seem to be trading for less than fair value and there are not all that many growth mid-cap tech stocks that do. EMC, IBM, Hewlett-Packard, and Dell all look like cheaper stocks than NetApp, but none look to have NetApp's growth potential and investors wanting that sort of growth in their portfolio might want to take advantage of this break in NetApp's momentum to buy shares. (For related reading, see EMC Buys More Storage Space.)

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