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Another red flag for storage stocks?

Investors drove shares of Network Appliance down 11 percent after the company's Wednesday night warning. Some analysts took it as another bad sign for the storage market, though most maintained optimism for the company's long-term prospects.

Shares were off $1.86 to $14.70 Thursday. Network Appliance (Nasdaq: NTAP)--known for its file servers that provide storage over the high-traffic, data-intensive networks typically used by Internet service providers (ISPs) and corporate intranets--is the second major computer storage maker to warn, following EMC (NYSE: EMC).

The company said it would miss profit and sales targets this quarter because customers delayed orders. Fourth-quarter revenue will fall 20 to 25 percent from the previous quarter's $288.4 million. The company had previously seen sales rising to about $320 million. Earnings are now expected to be 1 to 3 cents per diluted share, on an operating basis, far below First Call's consensus estimate of 10 cents a share. Management also said it would trim discretionary spending and reduce temporary staff.

Being that Network Appliance's warning came right after a warning from storage bellwether EMC, analysts took it as a bad sign for the storage market overall.

"We believe that storage industry revenues are going to be down 10 to 25 percent sequentially for the March/April quarter," wrote Salomon Smith Barney analyst Clinton Vaughan in a research note. Vaughan lowered numbers and price targets across the board, with the exception of storage software stocks, due to Network Appliance and EMC's news.

Vaughan lowered estimates and price targets on Brocade (Nasdaq: BRCD), down $1.59 to $23.81; EMC, down $2.70 to $29.50; Inrange (Nasdaq: INRG), up a penny to $9.86; and Network Appliance. He lowered price targets on Gadzoox (Nasdaq: ZOOX), down 4 cents to $1.82, and Veritas (Nasdaq: VRTS), off $2.06 to $56.69.

Network Appliance's "pre-announcement is indicative of the broad economic slowdown and IT spending squeeze, especially among technology companies," wrote J.P. Morgan analyst William A. Lewis, who maintained his "buy" recommendation.

But Lewis remained more optimistic about the long-term prospects for storage stocks.

"Future opportunities remain compelling," the analyst wrote. He said he expects Network Appliance to be among the first storage stocks to see re-acceleration. "We are still modeling for this pick-up for storage networking" in the third quarter of calendar 2001, he added.

Robertson Stephens analyst Dane Lewis was also bullish on the company's recovery. He compared the company to EMC "a few years ago before it reached the $1 billion revenue milestone, and Cisco (Nasdaq: CSCO) in the late ྌs as it drove to be the dominant player in the data-networking industry."

"We view (Network Appliance) as a major up-and-coming Internet infrastructure company," Lewis said. He maintained a "long-term attractive" rating on the stock while lowering estimates

Goldman Sachs' Laura Conigliaro also slashed estimates for the company, but suggested there is "now probably more room for earnings upside than downside. Although valuation metrics look pretty weak right now, we still like this company's prospects in a rebounding economy," she added.