Investors Worry About NetApp’s Latest Deal

December 22, 2015, 8:48 PM UTC

George Kurian, NetApp’s chief executive, says his company’s planned $870 million acquisition of SolidFire will open the door to new customers.

The rationale is that SolidFire, which already sells its solid-state or flash storage gear to cloud service providers, telcos and hosting companies, gives NetApp (NTAP) a better way to pitch those accounts.

Sunnyvale, Calif.-based NetApp (NTAP) had thus far focused on selling storage that businesses run in their own data centers.

NetApp, like its storage rival EMC (EMC) and other traditional tech companies like Hewlett Packard Enterprise (HPE) and Cisco (CSCO) all face a common problem. A big chunk of the data and applications that customers previously ran themselves, is moving to public clouds owned and operated by Amazon, Microsoft, even Google. That means those customers aren’t buying as much gear as they used to for their own needs.

Making matters worse from the IT companies’ point of view, is that Amazon (AMZN) Web Services, Microsoft (MSFT), and even more consumer-focused companies like Google (GOOG) and Facebook (FB) are designing their own hardware and having it manufactured to order by contractors.

In an interview with Fortune, Kurian acknowledged some of this, but said the opportunity to sell to other cloud companies remains real.

“At the very, very high end, the top five cloud providers are the only ones with the scale and ability to invest in designing their own systems. There is also a very large number of SaaS and cloud companies that can benefit from SolidFire,” Kurian said.

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SaaS, refers to Software as a Service, a sales model pioneered by Salesforce (CRM) 15 years ago. Salesforce runs customer sales tracking and other applications in its own data centers, selling that capability to customers on a per-use-per-month subscription basis.

So, instead of a customer paying a big lump sum for new software every three years and running it on company-owned servers and storage that have to be maintained and updated, the customer can instead offload all that grunt work to its SaaS provider.

More businesses are moving more of their software to the SaaS model, not just for sales and marketing, but also for expense accounts, human resources, and benefits management. That’s why we’re hearing a lot more about companies like Workday (WDAY) or or why SAP (SAP), for example, for human resources or SAP’s Concur for expense account processing.

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Kurian’s betting that those companies will buy what SolidFire has to offer.

And, he noted that for many big companies the cost of flash storage, which is pricier than traditional hard disk drives, is getting more competitive. For important business data that has to be accessed and updated fast, flash storage is becoming the norm, is his view.

“We see that primary data stores are increasingly going to all-flash storage,” he noted.

Others are not as optimistic. One pundit, who requested anonymity because he sometimes works with NetApp, said SolidFire would have been a great acquisition two years ago, but the move came too late in the game.

EMC, for example, bought XtremIO, a flash storage provider three years ago and ScaleIO, another, the following year.

MORE: NetApp was one of Fortune’s 100 best companies to work for in 2015: NetApp

Investors were also skittish about the debt NetApp is incurring to finance this acquisition. At one point Tuesday, NetApp shares skidded nearly 10% to $25.26 (a six-year low) before rallying a bit. After the deal was announced Monday, RBC Capital Markets downgraded NetApp from outperform to sector perform, saying the SolidFire buy makes NetApp itself a less attractive acquisition target.

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