Why It's Time To Buy NetApp

Tickers in this article: CSCO DELL EMB HPQ IBM NTAP ORCL
NEW YORK ( TheStreet) -- It has been a seesaw type of a year for big data giant NetApp (NTAP) . Since reaching its year-high of $46.80 on April 3, the stock has lost as much as 40%. This is despite what has been some solid performances relative to published estimates.

It seems investors have become concerned about the company's prospects, or more specifically, how will it fare against rivals such as IBM (IBM) and EMC (EMC) . Of late, it would seem that investors have favored EMC. However, NetApp has done more than hold its own in these battles.

For that matter, the two giants have traded neck and neck over the past couple of years. The question is what does the future hold. It also doesn't help that NetApp sports a valuation that is much higher than Dell (DELL) and Hewlett-Packard (HPQ) . But NetApp does not have their growth problems either.

Still, investors have begun to worry that increased competition and margin pressure will stall the company's ability to grow into its valuation. This is especially since its business is heavily reliant upon enterprise IT spending, which this year has been abysmal. On the other hand, investors should find it encouraging that the company was able to deliver a solid second quarter. But was it enough?

For the period ending October, NetApp reported net income of $236 million, or 63 cents per share, on revenue of $1.54 billion. Revenue increased 2% year over year and improved by 7% sequentially. These are certainly not numbers to write home about, but in this market, in-line results are always welcomed -- especially since bad news is always around the corner.

Likewise, profitability was a plus. The company improved gross margins sequentially by half of a point. Although the year-over-year comparison showed a one-point decline, I'm willing to give the company a pass on this because of the significant sequential improvements in operating margins which was up 54%. This means the company is doing well managing costs.

On the other hand, I do wonder how long can it keep costs down and still make investments in areas to grow. As noted, competition remains an issue for investors. If NetApp is unable to distinguish itself in ways that impresses the Street, there is a chance that its valuation may come under pressure.

In that regard, I can't imagine NetApp remaining an independent company much longer. On a similar note, as the "the cloud" starts to form and businesses begin to fully embrace migration benefits, it's hard to envision a company such as Cisco (CSCO) ignoring NetApp's value and making a bid for the company. Cisco, which has been on a shopping spree of late, has enough cash to make this deal happen tomorrow.