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Greenberg: Is NetApp’s Stock Flashing a False-Positive?

After NetApp’s earnings were leaked prematurely yesterday, it’s stock got clobbered. Seems third quarter guidance was below estimates.

Then came the earnings call and the company’s “don’t look there/look there” explanation. And the stock has been one of today' winners, up around 7 percent.

Based on NetApp's explanation, the miss was largely the result of its ballooning share count—the result of the dynamics between a convertible note, warrants and what had been its soaring stock price. (It’s actually a lot more complicated than that, and I would urge you to read a copy of the company’s earnings call transcriptif you want more detail.)

Reality: They can slice this thing any way they want, but this is all that matter to me—and should matter to investors—especially with NetApp’s stock trading near multi-year highs:

  • Operating margins are at a decade high and the company itself is telling you they are likely to slip.
  • Sequential revenue growth is falling, as is year-over-year growth.
  • And largely because it shells out a ton of stock options to its employees, NetApp prefers to be viewed as a non-GAAP company. And Wall Street dutifully obliges, even though options, as a form of compensation, are an expense. Options have been running about 9 cents a quarter.

Oh, and by the way: NetApp CEO Tom Georgens did a last-minute cancellation of an interview this morning on CNBC. The company offered no explanation at the time and (so far) hasn't responded to my inquiry this afternoon.

My take: You shouldn’t need a white board to figure out a company’s rising share count – and if you do, and it’s being blamed for the company’s lower-than-expected guidance, beware there may be some smoke in those mirrors.

Look for more details on this story when Herb reports on "Closing Bell" today between 3-4pm ET.

Questions? Comments? Write to HerbOnTheStreet@cnbc.com

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