Those tech companies that reported their earnings as part of the regular cycle all seemed to be more or less in good shape - numbers came in broadly in-line and guidance was relatively positive. Since then, though, numbers and sentiment have gotten a little wobbly, and maybe none more so than NetApp (Nasdaq:NTAP). Although these shares still seem to have meaningful value, investors have to ask whether the company's weak guidance is truly a byproduct of a weaker market, or whether competition has ramped up and management is unwilling (or unable) to acknowledge it.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

A Decent Close to the Fiscal Year
While NetApp's guidance was lousy, the fourth quarter numbers themselves were actually pretty good. Revenue rose 19% from last year on a reported basis, with organic revenue growth in the high single digits. Growth was exceptionally strong in the high-end systems (albeit from a lower base), while mid-range growth seemed to slow down.

Profitability was pretty solid as well. GAAP gross margin did fall about seven points from last year, but picked up slightly on a sequential basis. Operating income growth on a GAAP basis was a little odd (up 4% from last year, 41% from the third quarter), but more consistent on a non-GAAP basis (up 12% and 18%, respectively). In either case, NetApp significantly increased its R&D spending from prior levels.

SEE: Understanding The Income Statement

Guidance Spoils the Story
Management definitely surprised and alarmed the Street with its guidance for the next quarter. Management dropped its mid-point for revenue about 8% below the prior average estimate, while the EPS number drops by nearly 40%.

SEE: How To Evaluate The Quality Of EPS

So, what's going on here?

On one hand, NetApp has been criticized in the past for overly optimistic guidance and the transition from fiscal fourth quarter to the next fiscal first quarter has been a little dicey in the past. So there could be an element of conservatism here.

Management seemed to make it pretty clear that they were seeing a more difficult macro environment and that they didn't believe they were losing meaningful share. I'm not sure about this. EMC (NYSE:EMC) has been taking aim at NetApp's core mid-market business. What's more, EMC has spoken to investors and analysts relatively recently and didn't seem to have any major worries about the market. What's more, even Dell (Nasdaq:DELL) didn't seem to want to blame macro factors for its storage business performance, even though it posted disappointing numbers.

SEE: Earning Forecasts: A Primer

Is NetApp Losing Some Ground?
It's worth asking the question if NetApp is starting to lose some of its hard-won momentum. Converged stack is becoming more important, and the recent product announcements from IBM (NYSE:IBM) and EMC would seem to highlight NetApp's relative weakness here. What's more, the delays in getting a general availability release of ONTAP 8.1 to market may have created some problems.

The Bottom Line
Unfortunately for investors who have to make buy/sell decisions today, it's going to take a little time to see how NetApp's guidance and commentary plays out. If EMC continues to roll along, it will raise some questions about market share shifts and management credibility. On the other hand, if there is an industry-wide slowdown over the next quarter or two, it doesn't really damage the long-term potential all that much.

If the latter case proves true, that this is largely just a speed bump, these shares are still pretty cheap relative to the growth and cash flow potential. That said, EMC is the technology and market leader and it seems like the better play today.

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

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Regional Banks

    Obtain information and analysis of the iShares US Regional Banks ETF for investors seeking particular exposure to regional bank stocks.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... 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. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. 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 >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. 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 >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!