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NetApp: New Name, Better Prospects?

Alan, you timed your note on NetApp perfectly. I had recently added it back to my watch list. Yours is an excellent report and I appreciate the thorough review. I agree with the baseline formation of $19 and suspect we will see opportunities approaching that line over the next few months, as technology in general enters it's C2Q doldrums. Investors should note that global data volume is growing by almost 60 per cent per year(1) and NetApp has a well established solid position in the space. Like you, I admire their willingness to invest in technology during the current climate. I especially like their devlopments in de-duplication technology, a key to complete storage virtualization. See today's article [hyperlink] www.foxbusiness.com/ma...
Another play that your readers may want to consider is a major supplier to NetApp. Xyratex (NASDAQ: XRTX) depends on NetApp for 72% of their $187.8 million networked storage business. So why buy Xyratex when it seems to be a direct proxy for NetApp? A big change for Xyratex during the last quarter was a new relationship with Dell thanks to the latter's acquisition of EqualLogic. During their conference call last week, the company's CEO, Steve Barber said ""We were fortuitous in that Dell acquired a company we previously engaged with. We're in dialog with them on other technology."
Prospective investors should note, however, that any contemplation of Xyratex as a candidate for your portfolio must include some diligence in another area of their business. Xyratex is the leading supplier of "infrastructure" to hard drive (HDD) manufacturers. By "infrastructure" the company refers to the highly specialized capital equipment that HDD manufacturers require to make and test their products. In this segment, Xyratex has seen revenues fall 60% year over year, as HDD manufacturers tempered their plans in favor of supply/demand balance after a brutal price war in the first half of 2007. While caution due to macro considerations continues to weigh on capital spending, the HDD makers all have expansion plans targeted for the back half of this year. Xyratex's key customers in this space are the two leaders, Western Digital and Seagate Technology. Given the inexorable demand for storage, I believe that Xyratex, NetApp, Western Digital, and Seagate Technology offer potential for patient investors willing to measure their entry point and who are seeking a solid middle ground for a technology recovery in the back half of this year. At the moment, we believe that these companies have seen C1Q exiting with a slowing of ship rates and minor increases in inventory. As this becomes apparent, with possible revisions over the next few weeks, we expect multiple opportunity points to present themselves.
Thank you again for a well researched and thought-out article.

(1) See article on the recent IDC report: money.cnn.com/news/new...

Disclosure: We do not currently own any of the stocks mentioned in this reply