NetApp (NTAP) Viewed As A Dream Stock For MKM Partners LLC. CFA: Find Out Why
March 8, 2010 - The Wall Street Transcript has just published Business & Application Software Report offering a timely review of the Multimedia Software sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Kevin Shea, CFA, joined MKM Partners LLC in September 2007 and covers the technology/software sector for the firm's equity research team. The goal of MKM's research team is to help clients generate alpha within their portfolios by providing timely, insightful and actionable proprietary research. Prior to joining MKM, Mr. Shea worked at Merrill Lynch Investment Managers (later acquired by BlackRock) as an Analyst focusing on various sectors, including transportation, health care and housing. He received his B.S. degree from Pennsylvania State University, with a major in finance and a focus in accounting. He is a CFA charterholder.
TWST: Let's start on the network side. What's going on there from a development point of view?
Mr. Shea: One of the areas that we're seeing a lot of investments in is improving the WAN, where you got WAN optimization being a very highly focused-on area. You have a lot of companies that are looking at this area, a lot of customers saying that it's a great way to reduce costs, that you have the ability to add certain products there without really having to change your networking arena. From my point of view, we're looking at companies like Riverbed (RVBD) and Blue Coat (BCSI) to help them delay costs and increase their bandwidth, or rejuvenating what they already have. That's a critical area that has been seeing a lot of investments.
TWST: Coming off a tough year, 2009, what's going on from a pricing perspective in this space?
Mr. Shea: You certainly have far less aggressive discounting that was happening in the downturn. People are not necessarily needing to win every deal, and I've heard of a few companies that are sticking more to their pricing schedules, where I would see the aggressive discounting is within the installed base. But that's typical, I feel, in a good economy or bad economy. On new deals, you are definitely seeing greater pricing power from the vendors. In 2009 there was a lot of discounting with some of the maintenance streams, and you're not hearing that at all anymore. So vendors certainly have more power with their pricing schemes coming into 2010. I think it continues, it'll get better.
TWST: Let's look at F5. Where are they positioned? What makes them appealing?
Mr. Shea: They have their BIG-IP product, which does load balancing, optimization, SSL; they do live migration with VMware (VMW), V-machines. So you essentially have F5 as the data control point within the data center. One of the things that I've been talking a lot about to our clients is that there is an increase in server virtualization DAP. A lot of customers before were maxing out at about 30% virtualized within their environment, and that has been steadily increasing. And now people are talking more about getting to a 70% virtualized level. What that means is that there is greater risk within that environment if you are not able to appropriately balance the traffic that's requesting data from those virtual machines. So F5 is right at the forefront of that, where it's able to balance the traffic among the virtual machines.
TWST: Is there a name beyond F5?
Mr. Shea: I'm a big fan of NetApp right now. I think NetApp is a great stock to own. They pulled into a lot of deals with VMware, and so I see them being able to gain market share from EMC because of the NetApp-VMware integration capabilities. NetApp is the same thing, where it was trading at about $33 to $34, fell down to about $29, and we've been very bullish on NetApp at that level. We think they report February 17, but we think they have a great 2010 outlook. We expect them to have a great quarter. In general, some of the storage movements with unstructured data and the storage requirements necessary with server virtualization played very well into NetApp's strength. We are looking at NetApp as a company that pulled back in one of the faster-growing areas of storage and has some of the best integration capabilities with VMware, making it very attractive.
TWST: Anything else we should touch on?
Mr. Shea: Expect a strong 2010. I am bullish on the sector in general. I think you have a lot of companies with the pullback that are attractively valued and, like I said, some of my favorite names are F5, NetApp and Riverbed. I think they are very attractive at the current level. It should pull in a strong 2010 earnings reports.
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