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Technology Stocks : Network Appliance -- Ignore unavailable to you. Want to Upgrade?

To: Fortney Veeble who wrote (308)	6/10/1998 6:40:00 PM
From: Fortney Veeble	Respond to of 10934

Merrill Lynch analyst Steven Milunovich started coverage of NTAP today with a near-term "Accumulate" and a long-term "Buy". His 12 month price objective is $43 (only 16% above today's price of $37). EPS estimates are in line with the existing consensus ($.85 for FY'99, a 45% YOY growth rate). In the ML system, "Buy" is as good as it gets (1 = buy, 2 = accumulate, 3 = neutral, 4 = reduce, 5 = sell). Other other analysts use different terminology, with a "strong buy" = 1 and "buy" = 2, ... While the near-term recommendation and the price target are tepid support for NTAP, ML has estimated earnings - and earnings growth - which are in line with the present consensus, which other analysts see as strongly positive for the stock. Perhaps most significant about ML's announcement is simply that they have started coverage of NTAP. This move by a major brokerage house should increase the visibility of Network Appliance. In the following, I have taken excerpts, some out of context, from the ML report: "NetApp is relatively undiscovered yet likely to become an important computer company, especially as investors recognize the importance of appliances. We are not more aggressive on the rating due to a temporarily declining operating margin and upcoming product transition. NetApp's strategy is to identify promising product categories, such as file serving and network caching, that rely on data access via mature protocols. Two major trends play in its favor - the demand for storage and emergence of simple appliances. One surprise is how profitable appliances can be (think Cisco)." "NetApp has a new mantra. The old was 'fast, simple, reliable.' That created a new data storage product category and put the company on the map. The next level is 'scalable, manageable, available.'" Under "Investment Risks," ML states: "There will be a product transition in F2Q. 'Product transition' is a dirty phrase to technology investors. NetApp undergoes a product transition roughly every 15 months. New technology is introduced that results in a 25% price cut to users. We expect major new products offering a 50% performance increase to be announced in the October quarter." Under "Valuation," ML states: "The company is a category leader. NetApp looks like the winner in dedicated file servers. If the company executes, NetApp will gain increasing investor sponsorship and be one of the best names to own in the server segment." "The stock looks fairly valued on a statistical analysis. We do think, however, that consensus estimates (including ours) have a good chance of being conservative."

To: Fortney Veeble who wrote (308)	6/24/1998 7:59:00 PM
From: DownSouth	Read Replies (2) \| Respond to of 10934

The following URL links to an article in June 15 Internet World magazine. The article gives good press to the tornado forming around caching appliances, in which NTAP is as major player with their NetCache version of the network appliance. (CSCO, INKT, and CacheFlow are in this forming storm as well.) What the web page version of this article does not show is a graphic in the hardcopy version showing sales of caching appliance hardware sales going from near $0 in 1998 to $3.5B dollars in 2002. A similar line for software versions of caching appliances going to $500M during the same period. iw.com On another note, regarding NTAP's margins: I believe the company has warned the market that their margins will be decreasing as they sell larger file servers. Their new architecture of clustered servers allows for multi-terrabyte configurations. The downside of this is that disk drives become larger cost/price components of the configuration. Their is a margin squeeze on disk drives, whereas there is plenty of margin in the "headend" and software components of the configuration. So I expect their margins will be slipping from the 60% range down to the 45% range, while their revenue growth will be rewarded by more expensive configurations.