fwiw, RS "confirms" the Chameleon rumor in its downgrade this a.m. you just may have gotten the straight dope from Yahoo, pirate.
perfunctory bullet points follow.
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October 23, 2000
NETWORK APPLIANCE, INC.
Downgrading NTAP from Strong Buy to Buy Based on (1) Rich Valuation, (2) Increasing Competition in the NAS Segment and (3) a Lagging Caching Business.
We are Downgrading NTAP for the following 3 reasons:
1. NTAP's rich valuation limits upside. NTAP is currently trading at 34x CY01 revenue estimates. While we believe there is upside to our revenue estimates, we believe NTAP's growth will be limited by its size to about 100% a year. If NTAP achieves $2 billion in revenues next year, which we believe is realistic, NTAP would still be valued at 27x C01 sales. At this level, NTAP is trading at a higher multiple other Internet Appliances companies, who are trading at an average price/sales multiple of 13x 01 sales. SAN vendors, including Brocade and EMC, trade at 25x next years' revenues, which is still below NTAP’s multiple.
2. Competition is heating up in the NAS market. We believe EMC will announce its new mid-range NAS product (code named Chameleon) in the coming weeks. We believe the product is currently in Beta testing and is waiting to be rolled out for general availability. While the introduction of Chameleon does not change our confidence in NTAP's NAS market leadership, we believe it is a sign of things to come. The NAS market is becoming more competitive, which could lead to pricing pressure and subsequently have a negative effect on gross margins. Other competitors besides EMC include Veritas (CQ4), Compaq and as well as IBM, Dell and Sun.
3. Caching Business Remains Unproven. In the caching business (4-8% of revenues), we believe NTAP trails CFLO on the appliance side and Inktomi on the software side in terms of market success and functionality particularly in the streaming content delivery space, which we believe is the next frontier in the caching space. Long term, we believe NTAP will be limited to the enterprise segment of the caching market.
Based on these factors, we are downgrading NTAP from STRONG BUY to a BUY. We note this is NOT due to (1) any weakness in the current quarter or (2) any slowing in the growth of the NAS market. We continue to believe NTAP is a leader in the NAS and Storage Systems market and will continue to take share from the general purpose server vendors. We also remain confident that NTAP will continue to exceed our forward estimates. |
