NetApp’s market cap closed up over $17B today. That’s an increase of 21.4% in 30 days. Could NetApp possibly be undervalued?

In the storage battles, NetApp is the young kid on the block that won’t back down to the big bully– uh that would be EMC folks. After I read How to Castrate a Bull by Dave Hitz, one of NetApp’s founders, I remember thinking – “well that was different.” One of the business angles that struck me most in the book was Hitz’ story (it’s even more hilarious coming from Tom Mendoza, the head of sales back then) about how NetApp planned to grow to $1B in revenue.

At the time, NetApp was about a $40M company (roughly 1/3rd the size of Compellent today) and the management team was in some planning meeting. Evidently someone had the brilliant idea that if they simply doubled sales every year for 5 years they’d hit $1B in revenue. As the story goes, Tom Mendoza, who had left the room, came back and there was this $1B figure plastered on the white board. Upon seeing the target he said something to the effect of “are you guys insane?” And Hitz or someone said “like no dude…check it out – all we have to do is double sales every year for 5 years and we’ll actually beat $1B– the math actually works out to $1.3B…see?” And Mendoza says something to the effect of “I get the math brother Dave but I’m going to be out of a job soon if you guys sign me up for that.”

Mendoza told me one time, in retrospect you have to have stretch goals, big goals. Then he said to me “I always tell people who are having financial difficulties just increase your income by 10X and your troubles will disappear.” I remember thinking “I like the way this guy thinks.”

What’s the point of this you ask? Well…NetApp is at it again. As seen in an analysis from 8/15/2010, NetApp’s 2-year growth rate is a whopping 25%. In case you’ve been sleeping for a while that time period includes the most severe downturn since computers were invented. For context, 3PAR is 1/20th NetApp’s size and its 2-year growth rate is 26%. 3PAR just sold to HP for about 10X revenue – So HP math would put NetApp’s valuation at about $40B or somewhere in between VMware and EMC’s market cap. Holy cow, at $17B is NetApp severely undervalued? My brain can’t even go there…

NetApp’s most recent quarter saw the company’s annual revenue increase by 36%, which is just incredible. So I asked Tom Georgens inside the Cube at VMworld 2010 – “How is it that NetApp is growing at 30% and can it continue?” Here’s Tom’s answer:

Georgens told us that: 1) 30%+ growth is heavily dependent on the macro economy and 2) NetApp doesn’t try to peg a growth rate or a specific dollar figure; rather it wants to simply gain 1-1.5 points of share each year. And further that NetApp has gained more share this year than it has at any time since the bubble bust over a decade ago.

So the formula (by implication) is very simple. Profitable Market + Share Gain = NetApp Success.

Do I really think NetApp is a bargain at $17B? Hmmmmm. In reality I have no idea about such things. But my recent analysis of 3PAR suggested that at $200M in revenue, the company would still take nearly 8 years to hit $1B. NetApp at $40M did it in five years. If Georgen’s simple formula of gaining a point to a point and a half each year holds, and the storage market continues to be growing and profitable then anything is possible.