Smart Money Analysis: Hedge funds back NetApp’s Georgens

By Jim Finkle

BOSTON (BestGrowthStock) – Wall Street was dismayed 15 months ago when NetApp Inc (NTAP.O: ) named Tom Georgens, a former engineer, as chief executive, knocking 6 percent off the data storage provider’s market cap.

But now that Georgens has proved his worth by steering the company through the depths of the tech spending recession — and boosting its stock price more than rivals — some of the savviest investors are raising expectations.

Hedge fund stars John Paulson and Steve Mandel of Lone Pine Capital as well as Tiger Management alum Philippe Laffont, who runs Coatue Capital LLC, recently bet that the stock had more room to run. The managers, always on the prowl for acquisition plays, may also have been attracted by the persistent rumors that a larger competitor will try to buy NetApp.

They added new positions in NetApp during the third quarter, part of the buying of almost $400 million worth of NetApp shares. That made NetApp the second-largest new holding in the quarterly “Smart Money” survey of 30 of the largest stock-picking hedge funds, conducted by Thomson Reuters.

“It helps to have somebody with a technical background running a technology company where technology is changing very rapidly,” said Wedbush Securities analyst Kaushik Roy.

Under Georgens, NetApp has gained share from rivals, moving up from No. 5 in the market for corporate data storage equipment to No. 3 behind EMC Corp (EMC.N: ) and International Business Machines Corp (IBM.N: ). NetApp passed Hewlett-Packard Co (HPQ.N: ) and Dell Inc (DELL.O: ) on its way up in the $20 billion market.

“NetApp has come a long way over the past two years,” Georgens said in an interview with Reuters last month. “We have proven we can create shareholder value.”

Investors have taken note. Since Georgens took over, the company’s stock has climbed 121 percent, more than double the gain of EMC. The Nasdaq has gained 27 percent during the same period.

Analysts say the company’s secret has been its NAS, or Network Attached Storage, technology that is laden with advanced features that are easy to install and use.

A NAS system is essentially a disk drive attached to a computing device that can be programed to handle specialized tasks. “They’ve been doing a lot of neat things with features,” said Jefferies & Co analyst Bill Choi.

One key achievement was to tweak NetApp’s software so that its storage equipment works well with fast-selling virtualization software sold by VMware Inc (VMW.N: ).

Virtualization software allows one server to perform the work of multiple computers. NetApp works with VMware to help businesses design data centers that use products from both companies.

Keeping the strategic partnership running smoothly is no simple task — VMware is a subsidiary of NetApp rival EMC. Yet so far NetApp has been able to deliver a product that VMware’s customers want badly enough to make the software maker swallow its pride and promote a rival’s hardware.

SHOP TALK

Georgens is an industry veteran who has held management positions with NetApp competitors, including EMC, where he spent 11 years.

One of Georgens’ assets is his engineering background, which gives him the ability to talk shop with technology executives when trying to close big deals, analysts said.

With a masters degree in computer and systems engineering from Rensselaer Polytechnic Institute and an MBA from Babson College, Georgens can more easily keep up with all the latest developments in research and development.

Lone Pine Capital and Coatue Capital LLC declined to discuss their investment in NetApp.

One factor behind their movement into the stock may be persistent speculation that NetApp could be acquired by a bigger technology company.

Dealmaking in the storage sector has heated up over the past year as Dell, EMC, HP, IBM and Oracle Corp (ORCL.O: ) jostle for dominance.

HP bought 3PAR for $2.4 billion earlier this year after a heated battle with Dell. IBM recently completed the $1.7 billion acquisition of Netezza Corp. EMC last month said it plans to buy NetApp rival Isilon Systems (ISLN.O: ) for $2.25 billion.

Georgens said in the interview that he is not out to sell the company, but that such a decision is ultimately beyond his control.

“The message to the team is really simple: Excellence is our best defense,” he said. “But that said, if someone wants NetApp really badly for whatever reason, and is going to make a compelling offer, that’s a shareholder matter, that’s not up to me.”

The largest new holding in the third quarter among the Smart Money 30 was the well publicized purchase of $427 million of J.C. Penney Co Inc (JCP.N: ) stock by Pershing Square Capital Management’s Bill Ackman.

(Additional reporting by Ritsuko Ando; editing by Aaron Pressman and John Wallace)

Smart Money Analysis: Hedge funds back NetApp’s Georgens