Before, After and Throughout the 90s Bubble
NetApp Inc. (NTAP, Financial), is a data and computer storage company. Founded in 1992, the company endured through the mid 90s bubble, and lowered its operating capital from $1 billion to $800 million.After the bubbles’ burst, the company managed to grow its capital steadily over the years (6.2$ billion as of 2012), with two periods of major acquisitions (1997-2004, Internet Middleware, Spinnaker Networks, Alacritus, Decru and 2012-2013, Cache IQ, and IronGrid). This has allowed the company to gain cutting edge technology and stay at the top of the market. Its last acquisition was Engenio, which costed the company a loss of 5 percentage points on its gross margin.
The firm disclosed and 8K report on March the 12th, where the management decided to enforce some business realignment measures. These include the reduction of worldwide headcount by 5% -meaning a cash charge announced by the company between $35 and $45 million, covering as much as 600 employees. It is a necessary step for the company, that doesn’t really impact hard on its margins or cash flow (considering 3$ billion of yearly operating expenses by the firm).
NetApp’s Advantages
The company was able to gain major market share as a result of its flagship product adaptability on functioning networks (the NetApp filers, referred to as file storage), that also supports nearly every data management protocol in the market. It also has, a broad network of re-vendors and OEM relationships with firms like IBM (IBM, Financial), Hewlett-Packard (HPQ, Financial) and Dell (DELL, Financial), that rebrand and sell a wide variety of the companys’ products.
NetApp is a pure-play vendor of networked storage. Being the second largest on the market, the company provides its clients with a large pool of data space instead of isolated volumes, thus enhancing the utilization rates and manageability.
The information saved by the company’s clients is really sensitive for them. A company’s chief information officer rather store this sensitive data on NetApp’s efficient and secure -proven- products, rather than on an unproven smaller competitor. This provides NetApp with high customer switching costs. The company also has strong OEM relationships network, that allows the company to amplify its sells. And its consistent growth over the years (following the burst of the financial bubble in 2001), enables the company to generate a steady and strong volume of cash flow building up a comfortable net cash position, giving the firm a financial flexibility to endure cyclical downturns, flare-ups and emerging technological threats.
The increasing storage demand, and the broad networked storage client portfolio the company has (being this technology one of the stickier on data centers), provides the company with an economic moat that helps keep competitors at bay. Also, this client portfolio provides the company an advantage on clients looking to upgrade, expand, or standardize their network into a single vendor architecture, seeking to simplify training and support. Moreover, all the acquisitions the company made over the years allowed it to enhance and broaden its product portfolio, which in turn has enabled it to take customers from low end products to high end ones, up through a value chain according to the clients’ crescent needs.
Management and employees
Management-wise, since Daniel Warmenhoven took down the charge in 2009 chairman and CEO charges were split into two. Tom Georgens took over as CEO, with a baggage of great experience in companies of the industry (long stays at EMC and Engenio). Board members are chosen annually. The firm has spent large sums on share repurchases, but also uses options to motivate its employees. For 7 years in a row, it has been voted as one of the bests places to work in (always above the 50th place), and also awarded several prices on this category. These motivations, a comfortable work environment, and the possibility of growth gives the company an advantage on the scout for new talents.
Fundamentals
The company's’ Operating Margin is expanding (9.60 and 6.10 above the industry median). Its dividend yield surpassed the companys’ previous max of 1.19 being now at 1.21. Moreover, the stock trades very close to its historic low valuations, at 21 times the company’s earnings and 2 times its sales. This might be why Jim Simons (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and John Hussman (Trades, Portfolio) invested in NetApp lately.
Its Net Margin, ROE, ROA, ROC, Revenue Growth, EBITDA Growth and EPS Growth are all above the industry median (5.28, 5.51, 1.79, 41.61, 11.7, 8.4, 0.5 points above respectively). As long as the company make the right acquisitions to allow it to the cutting edge technologies the company faces acceptable growth in the long run. In the short mid term, the company still has a narrow moat and an experienced management to face the challenge of emerging technologies.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned
