NetApp doesn't fear cloudy skies

Recent Price $129
Dividend $2.08
Yield 1.6%
P/E Ratio 20
Shares (millions) 213.0
Long-Term Debt as % of Capital 52%
52-Week Price Range $129.65 - $70.82

 

NetApp ($129; NTAP) has positioned itself in the right spot to profit from technological change. The company offers a variety of hardware, software, and services related to cloud data, as well as traditional storage markets.

The company’s all-flash storage solutions should help drive growth for the next few years. Flash systems offer greater storage capacity with lower power requirements, just right for data centers. These systems represent about 35% of NetApp’s installed customer base, leaving a massive market opportunity yet untapped.

Cloud spending has slowed in recent quarters as companies try to control costs by delaying or scaling back investment in networks, fearing an economic slowdown. However, the long-haul outlook for cloud computing remains appealing, given its cost and versatility advantages over traditional storage. AI has already begun boosting demand for cloud storage, which should favor NetApp. We see upside to Wall Street’s modest expectations. NetApp, yielding 1.6%, is rated Buy.

The growth story

NetApp’s per-share profits rose at an annualized rate of 15% over the last three years, supported by modest sales growth, substantial improvements in profit margins, and a 6% decline in the share count. Analysts project profit growth of 16% in the April quarter (results expected May 30), slowing to 4% in the fiscal year ending April 2025 and 7% in 2026.

We believe NetApp can exceed those conservative targets. The company has topped the profit consensus in eight straight quarters, beating by at least 11% in five of those periods. Over the last 90 days, the profit target for fiscal 2025 has risen 5%, while the 2026 estimate has increased 4%.

Going forward, the support business (gross profit margin of 92% in the January quarter) should outgrow the less-profitable hardware segment (gross margin of 63%). Software and recurring revenue account for about three-fourths of total company revenue, boosting our confidence in NetApp’s ability to keep growing even during difficult times.

The company has partnered with Microsoft’s ($446; MSFT) Azure platform, Amazon Web Services, and Alphabet’s ($175; GOOGL) Google Cloud to provide data-management and storage software, making it the only storage pure-play embedded in the core platforms of the three largest cloud providers.

Odds and ends

• The company’s dividend accounts for less than one-third of operating cash flow. NetApp doesn’t have a strong history of dividend growth, but the payout seems secure.

• NetApp earns a Quadrix® Value rank of 27. But, at 18 times trailing earnings, the stock trades 17% below the median for tech hardware and storage firms and 13% below its own 10-year norm. In our view, the shares seem attractively valued relative to their growth potential.

NetApp Inc., 3060 Olsen Drive, San Jose, CA 95128, (408) 822-6000, www. netapp.com.

 

 

Quarter Per-Share Earnings* Sales Change Quarterly Price Range P/E Ratio
Range
Jan '24 $1.94 vs. 1.37 5% $91.78 - $70.82 16 - 13
Oct '23 1.58 vs. 1.48 -6% 80.02 - 71.25 14 - 13
Jul '23 1.15 vs. 1.20 -10% 80.53 - 61.54 14 - 11
Apr '23 1.54 vs. 1.42 -6% 69.75 - 59.73 13 - 11

 

Year
(Apr.)
Sales
(Bil.)
Per-Share Earnings* Per-Share
Dividend
52-Week Price Range P/E Ratio
Range
2023 $6.4 $5.59 $2.00 $79.09   $58.08 14 - 10
2022 6.3 5.28 2.00 96.82 - 72.04 18 - 14
2021 5.7 4.06 1.96 78.77 - 39.81 19 - 10
2020 5.4 4.05 1.92 73.69 - 34.66 18 - 9

 

Quadrix Scores
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Perform-
ance
Reversion
84 93 27 73 79 94 97 10

 

* Earnings exclude special items.
NA Not Available.
Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.