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. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  2. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  3. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  4. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  5. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  6. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  7. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  8. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  9. Stock Analysis

    What Seagate Gains by Acquiring Dot Hill Systems

    Examine the Seagate acquisition of Dot Hill Systems, and learn what Seagate is looking to gain by acquiring Dot Hill's software technology.
  10. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  1. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  2. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  3. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  4. 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 >>
  5. 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 >>
  6. 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 >>

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!