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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: DownSouth who wrote (14169)	1/5/2000 9:04:00 PM
From: voop	Read Replies (2) \| Respond to of 54805

Found this November review of NTAP from DLJ DONALDSON, LUFKIN & JENRETTE November 17, 1999 Michael S. Kotlarz (212) 892-4271 Kevin A. McCarthy (212) 892-3809 NETWORK APPLIANCE, INC. (NTAP: $103) * Break-out Quarter;Raising Estimates & Price Target Range: Earnings Per Share 2000E vs 1999A % Chg 105-67 Old New P/E Ratios F1QA $.16 vs .10 +60% (FY:Apr.) 2001E $1.05 $ 1.13 91.2 F2QA .19 vs .11 +73% 2000E .73 .78 132.1 F3Q .20 vs .12 +67% 1999A .45 228.9 F4Q .23 vs .13 +77% 1998A .29 355.2 Yield: % Dividend: $ Market Cap.: $8.8B Avg. Trading Vol.(000): 300 5-Yr. Growth Rate: 65% Book Value: $4.33 RATING: Buy Change: None 12-Mo. Target: $145 Reported FQ200 EPS of $0.19 vs. $0.11 and consensus estimates of $0.17 We are raising our FY00 and FY01 estimates from $.73 and $1.05 to $0.78 and $1.13 respectively We are raising our price target to $150 from $75 which assumes a 15x price to sales multiple on FY01 revenue o f $ 810 million Accelerating revenue growth and stable gross margins were the primary driver of the upside. Business was strong across all segments and geographies; Software and NetCache were the two primary standouts. Internet companies now account for 30% of total revenue versus 25% and 16% in the previous 2 quarters respectively. VIEWPOINT Network Appliance reported an extraordinary quarter last night after the close. NetApp posted $. 19 in EPS versus $0.11 in the year-ago period and Street consensus of $. 17. Revenue grew 90% year-over-year to $124.7 million, accelerating from the prior quarter's growth rate of 80%. Business was strong across all product segments and across all geographies. Gross margins were better than expected as software grew to 14% of total revenue from 10% in the previous quarter and as the NetCache segment rebounded. Demand in the mid-range storage market is white-hot and NetApp's simple fast and reliable proposition for shared data is allowing it to take a sizable piece of the market. Accordingly we are raising our FY00 and FY01 estimates to $0.78 and $1.13 from $.73 and $1.05 respectively. We are also raising our FY00 and FY01 revenue estimates from $495 million and $757 million to $528 million and $810 million respectively. SAN companies are trading at multiples to forward year revenue between 20x and 60x with similar market opportunities, growth rates, and profitability profiles to Network Appliance. At 10x revenues we believe NTAP is an extremely attractive relative value. Based on its huge market opportunity, accelerating growth rate, and its stable margins we believe NTAP can close the valuation gap significantly. We continue to rate the shares a Buy and are raising our price target to $145 which assumes a 15x price to sales multiple on our FY01 estimate of $810 million. Total revenue grew 90% year-over-year and 21% sequentially to $124.7 million. Revenue growth was strong across all products and all geographies. The company shipped over 1,100 units with an average capacity around 300 gigabytes. The strength in revenues came from further penetration of Internet companies which accounted for 30% of total revenue versus 25% and 16% in the previous two quarters. NetCache also added to the revenue strength, growing 66% sequentially to 7% of overall revenues from 5% of revenues in the previous quarter. The sales force reorganization had a significant positive impact on the NetCache business in the quarter, and that segment showed particular strength in the North American market. The software business was a stand-out performer, accounting for 14% of overall revenue up from 10% in the previous quarter and helped support gross margins. Strong demand for SnapMirror, SnapRestore, and Cluster Failover drove the exceptional software growth. Gross margins declined only 10 basis points sequentially as the high-margin software business offset additional storage capacity contributions. We believe these new functionalities are allowing NetApp to better leverage is incumbency in technical environments to Enterprise environments. NetApp's database bookings, a good indicator of this trend, grew to 10% of total bookings, up from 8% and 6% in the previous two quarters. Overall booldngs exceeded revenue for the quarter indicating that the company grew backlog. The reseller agreements with Dell and Fujitsu remain on plan and together accounted for 5% of total revenue versus 4% in the previous quarter. INVESTMENT CONCLUSION We believe it is increasingly clear that the Network Attached Storage marketplace is more than a niche opportunity, and NTAP is not just the marketshare leader but the market defining company. NTAP is a pure-play on the white-hot mid-range open systems storage market. The fact that EMC and IBM have recently made acquisitions in order to participate in the mid-range is a testament to its growth prospects and opportunity. NTAP's idea of simple, fast, and reliable storage appliances is a compelling value proposition, and its rousing success in the Internet marketplace validates this clam NTAP's products allow heterogeneous computing environments to share data, something many corporations want but few storage suppliers offer. We believe NTAP's market leadership, growth profile, and technological innovation will allow it to close the valuation gap between itself and the SAN universe. At 10x FY01 revenues NetApp offers a compelling relative valuation and we continue to recommend it with a Buy rating and a $145 price target. Bold emphasis is mine. Note that the target has already been reached as it is reporting pre-split prices. I like market defining companies as a rule. The author may have a position in the above security. Voop