Network Appliance Shares Drop on Fears of Business Cutbacks in Tech Sector

Network Appliance (NTAP) shares were significantly lower, early afternoon on Wednesday, trading down by $1.44, or 6.81%, to $19.70 on moderate volume of 3.9 million shares. The downturn is the result of a mass selloff in tech (NASDAQ is getting clobbered by 3.17%), and can also be attributed to a Wednesday morning Wall Street Journal report that indicated business spending on software and equipment would decline in the first two quarters before rebounding slightly in the second half. This would leave an annual growth rate of just 2% after accounting for inflation.

According to Forrester Research, overall U.S. tech spending growth is also expected to slip with estimated growth for 2008 of 5.2%, down from 5.7% last year. Clearly with tech spending on the decline, the market is betting against what was an overly optimistic outlook based on guidance Network Appliance gave for the fiscal third quarter. It reported earnings per share of $0.33 to $0.34, on sales of $872 million to $883M, compared to analyst estimates of $0.32 on sales of $852.6 million. The guidance was issued despite the fact that its U.S. business grew only 9% over the second quarter of last year, with sales by 22 of their largest U.S. commercial accounts down 4% over the year ago period.

With fears of spending and doubts about the earnings picture now becoming more justified and real, Network Appliance shares are affecting that reality in their valuation.

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