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Netapp (NTAP) Stock May Need To Digest Recent Gains First: Analyst

 February 14, 2013 10:20 AM

(By Balaseshan) FBN Securities analyst Shebly Seyrafi said NetApp Inc. (NASDAQ: NTAP) shares in the near-term are going through a digestion phase after a strong move, and believes the stock may need to digest recent gains first.

The brokerage reiterated its "Outperform" rating on shares of the storage systems provider and data management while maintaining a $40 price target.

The analyst is impressed about the fiscal Q3 EPS results but is less impressed by the still-weak product revenue growth (flat) that was hurt by weak original equipment manufacturer (OEM) revenue growth (down 17% year-over-year) while branded revenue growth (up 8% year-over-year) improved.

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Seyrafi said the strong EPS beat ($0.67 versus $0.57 consensus) was basically due to good services revenue (up 12% year-over-year), nice service margin (up 1-percentage-point sequential) and good operating expense management (2-percentage-point lower than his model). APJ (13% revenue) was strong at 17% growth.

The analyst thinks that after a strong 36% stock move over the past three months that the stock may move sideways near-term. However, he thinks it eventually moves higher as he thinks that fiscal 2014 EPS consensus of $2.48 is too low, NTAP is still relatively early in its mid-range (FAS 3220/FAS 3250) product cycle, and net cash is high (about $12/share).

Seyrafi said NTAP appears to be have become more concerned as the quarter progressed, and this led to the company's operating expenses of $707 million for Q3 being much lower than his previous $741 million estimate. He sees NTAP being careful on operating expenses near-term.

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NTAP is trading down 2.60% at $34.89 on Thursday. The stock has been trading between $26.26 and $46.80 for the past 52 weeks.

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