The brokerage raised concerns that expansion into new markets may not be enough to offset slowing growth in the telecom and dot-com markets.
Shares closed regular trading down $12.19 to $61.38. The stock has recovered slightly since Robertson Stephens downgraded it with a bunch of other companies in early January because of a "significant slowdown" in information technology spending, saying it would crimp average selling prices and total sales for a bevy of companies.
Goldman Sachs analyst Laura Conigliaro reduced her rating to "market outperform" from "recommended list" because of softer demand in some of the company's key end markets and valuation concerns. While the company is expanding its exposure to new markets and gaining traction in existing ones, the analyst doubts the gains are enough to offset the likely slowdown in the telecom and dot-com markets for the near term.
The analyst compared Network Appliance to Sun Microsystems, which recently warned about lower numbers for 2001. Sun gets 25 percent to 30 percent of its revenue from the telco market. Network Appliance gets about 30 percent of its sales from the communications and Internet service provider market and had been getting another 5 percent or so from dot-coms.
Offsetting these is the company's expansion into new markets such as energy and health care and growth in its existing business applications such as database servers.
"Unfortunately, we cannot convince ourselves that the timing of one will be an exact replacement for the other, and in the current environment, we are erring on the side of conservatism," Conigliaro said in her research note.
The stock also may be overvalued, she said, "particularly given the stock's well-over-50 percent run-up from its recent low of $45 in late November." While the company is valued similarly to other storage stocks such as EMC and Veritas, these companies are already generating a larger percentage of revenue from business customers, the analyst noted.
Conigliaro also made small downward revisions in numbers for the next several quarters to reflect the uncertainties, but she said she believes "that an acceleration and upside is possible in fiscal year 2002."
"We emphasize that our action is not reflective of a change in our positive view of (Network Appliance's) prospects in the storage networking market," Conigliaro said.