• NetApp, Inc. beats earnings estimates, with FYQ2 2025 EPS and revenue surpassing expectations, driven by strong growth in its Hybrid and Public Cloud segments.
• NetApp’s focus on AI and cloud infrastructure is evident, securing over 100 AI and data-lake modernization wins and expanding partnerships with Google Cloud and AWS.
• Analysts have mixed ratings but raised price targets, citing macro concerns. NTAP’s solid execution and strategic positioning suggest a “cautiously optimistic” stance.
• NTAP trades at a reasonable valuation with a forward P/E of 16.8x, reflecting strong earnings growth and potential in AI and cloud segments. Rated as a Buy.

NetApp, Inc. (NASDAQ:NTAP) is an intelligent data infrastructure company that provides software, systems, and services for hybrid and multi-cloud environments to clients across industries and the globe. The company was founded in 1992 and has around 11,800 employees, earning over $6 billion in revenue annually. Its Hybrid Cloud segment is its primary revenue driver that provides hardware and software for data infrastructure. Its smaller Public Cloud segment provides software solutions across all major cloud providers. With a market cap of over $26 billion, NTAP is an established stock in the IT space and one that is in a good position to benefit from the AI boom that has started in the last couple of years.

FYQ2 2025 Earnings

NTAP recently released FYQ2 2025 earnings results and posted beats over EPS estimates ($1.87 vs. $1.78 expected) and revenues estimates ($1.66B vs. $1.65B expected). The company is pretty consistently beating earnings estimates and is currently on a seven-quarter streak of topping revenue estimates as well. However, the sales surprise of 0.8% was the weakest in that string of beats. The better-than-expected results saw a tame reaction in the markets, as investors might have been expecting something more impressive given the boom seen in other companies related to AI.

Top-line results reflected a continuation of stable, solid growth rates after the 2023 quarters. With net sales up 6.2% YoY in FYQ2, NTAP saw its second-largest increase in sales in the last four quarters. The Hybrid Cloud segment saw sales up 5.8% YoY and 7.8% QoQ, and the smaller Public Cloud segment saw slightly stronger growth of 9.1% YoY and 5.7% YoY. Most of the gain in sales came in the delivery of product (up 8.8% YoY and 14.8% QoQ) while support and professional services sales were mostly flat sequentially (1.3% QoQ) and slightly higher year-on-year (2.8% YoY). The area with the most explosive growth in FYQ2 was cloud storage services, growing 43% YoY, as this area saw sales grow from new business wins and partnerships with major cloud service providers. In general, top-line growth rates remain solid for NTAP, and that is summed up in its comprehensive annualized flash array revenue run rate growth of 19% YoY, which is the fourth consecutive quarter of high-teens to low-20s growth in that metric.

Moving to profitability, FYQ2 2025 results showed a mixed performance across segments. The large Hybrid Cloud segment saw gross margins contract -60 bps sequentially and -90 bps from a year ago to 71.8%, the joint lowest in the last five quarters. The decline in margins looks to be a result of rising component costs, specifically SSD costs, and the decision to try to lock in the supply of the component as prices rose throughout the year. In the smaller Public Cloud segment, the margin picture was much rosier. Public Cloud’s gross margins jumped 270 bps sequentially and 760 bps from a year ago to 73.8%, the first quarter that Public’s gross margin was higher than Hybrid’s. The success in the cloud operations helped to keep the overall non-GAAP gross margins unchanged YoY at 72.0% which is at the upper bound of the guidance of 71-72% set out for the quarter. Additionally, NTAP’s post-adjustment operating margin saw an increase of 180 bps YoY to 28.6%, topping FYQ2 guidance of ~28%.

NTAP’s business expansion continued to show a focus on AI and cloud infrastructure. Management noted that it had secured “over 100 AI and data-lake modernization wins across geographies and industries” including some strong enterprise wins like Anaplan, Aruba, San Jose Sharks (NHL team), and Domino Data Labs. It also expanded partnerships with major cloud providers Google Cloud and AWS, where NTAP technologies will be used as data storage for AI-focused cloud services. Additionally, NTAP gained access to new opportunities in the US public sector through a distributor agreement with Carahsoft Technology. The new business growth caused an optimistic management to upgrade the full-year guidance of net sales for FY2025 from $6.48B-$6.68B to $6.54B-$6.74B. The strong reading of consolidated operating margins in FYQ2 also gave management confidence to raise guidance of that metric from 27-28% to 28-28.5%.

Analyst Reactions

The reactions to NTAP’s earnings by analysts were mixed, with no changes in ratings on the stock. TD Cowen and Stifel remained the most optimistic, maintaining “Buy” ratings while analysts from other institutions stuck with neutral ratings (including “Neutral,” “Market Perform,” and “Equal-Weight”). BofA analyst Mohan did not move from his “Underperform” rating and was the most bearish. Despite there being no changes in ratings, every analyst raised their price target (even Mohan) following the earnings results, pushing the average target price across the major analysts up from $127.38 to $135.63 (in the chart, $137.27 refers to the average of all analysts covering NTAP). The general caution towards the stock comes from an assessment that the macro environment is still unfavorable to NTAP, and enterprise spend on storage is not increasing like analysts would like to see. There was an appreciation of the solid growth that NTAP showed in its results; although, there was also a feeling that the robust all-flash revenue growth could not be sustained.

The analysts’ caution seems excessive given NTAP’s demonstrated execution and strategic positioning. While macro concerns are valid, the company has shown it can grow and take share even in a challenging environment. The stock trades at reasonable valuations given its growth and profitability profile, and the company has multiple growth drivers (flash, cloud, AI) that could support continued outperformance. A more appropriate stance might be “cautiously optimistic” rather than neutral/cautious, particularly given management’s proven ability to execute and the company’s strong positioning for emerging opportunities in AI infrastructure. Management noted in the conference call that the “large opportunity of enterprise AI is still ahead of us” which means that investors will probably need to wait for an NTAP AI boom, but the potential is there. The market’s initial negative reaction to strong results suggests sentiment might be overly pessimistic, potentially creating an opportunity for investors with a longer-term horizon.

Valuation

NTAP’s value comes from its ability to drive revenue growth into earnings growth through a business with solid margins. This is demonstrated through the differences between its price-to-sales (P/S) and price-to-earnings (P/E) ratios. The market currently trades NTAP with a forward P/S multiple of 3.75x, which is high relative to the technology sector’s already elevated median of 3.20x. However, strong earnings growth has NTAP’s forward P/E ratio at 16.8x, which is cheap for a technology stock (median for the sector is 25.4x) that has exposure to the AI trend.

In the end, the valuation driver of gains relies on NTAP maintaining solid profitability through the continued expansion of its business, even if that expansion slows in a tougher macro environment. I rate NTAP as a Buy with an eye on future earnings results to monitor its profitability as it grabs market share in the AI and cloud segments.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• NetApp is a strong tech stock with solid earnings and a reasonable ~17x P/E, despite a challenging macro climate and a high S&P 500.
• The company delivered a beat-and-raise in Q2, lifting its full-year EPS guidance to $7.20-$7.40 (with the previous high end of its range now the new low end).
• The stock trades considerably cheaper than direct rivals like Pure Storage and Nutanix on both a P/E and revenue basis.
• Use the current lull in NetApp’s stock as a buying opportunity, given its strong fundamentals and growth prospects.

With the S&P 500 continuing to hover around all-time highs, it has become increasingly challenging to find growth stocks that still trade at decent value and also have meaningful catalysts to spark continued earnings growth through 2025, despite a potentially tougher macro climate. Investors have to deploy careful stock-picking in order to beat the markets from here on out.

NetApp (NASDAQ:NTAP), in my view, is a great tech stock to invest in for investors who still want a solid earnings base and a reasonable P/E entry point. The storage vendor has seen 40%+ YTD gains, but in my view, this upside has been more than justified by the company’s consistent margin expansion and EPS growth.

I last wrote a bullish note on NetApp in September, when the stock was trading just above $120. Since then, NetApp has traded in a flattish pattern, despite the fact that the company just released strong fiscal Q2 (September quarter) results that featured double-digit EPS growth as well as ARR expansion. In my view, the fact that Wall Street is ignoring NetApp’s strengths makes this a perfect moment to add to your position here in an otherwise expensive stock market; and as such, I’m reiterating my buy position on NetApp.

In my view, here are the core reasons to be bullish on this company:

• Tremendous AI tailwinds from data lake modernization projects – Deploying AI applications requires training AI models that, above all, consume copious amounts of data. This means that enterprises that want to deploy AI tools have to maintain huge “data lakes” for AI models to work with. NetApp, meanwhile, specializes in providing storage solutions for these mounds of data at an efficient cost.
• “Storage as a service”- In the past, companies used to buy storage hardware and maintained all of their data in their own data centers. But now, vendors like NetApp are helping their clients to modernize their data strategies, and NetApp in particular can help to build out a “hybrid cloud” model where a company can choose to have some data assets in-house and others in the public cloud.
• Recurring revenue and ARR – In line with the company’s vision of storage as a service model rather than as a hardware purchase, NetApp continues to chase double-digit growth in ARR, which has reached $3+ billion. The company enjoys a recurring revenue stream at a high 70%+ gross margin.
• Margin expansion driven by supply chain visibility – The company has also continued to drive consistent operating margin expansion through keen opex cost controls plus a forward-purchasing model for SSD flash (one of its key raw components) that has protected the company from a recent spike in prices.

Stay long here and use the current lull in NetApp’s stock as a buying opportunity.

Q2 download

Let’s now go through NetApp’s latest quarterly results in greater detail. The Q2 (September quarter) earnings summary is shown below:

NetApp’s revenue grew 6.1% y/y to $1.66 billion, ahead of Wall Street’s expectations of $1.64 billion (+5.2% y/y) by a one-point margin. Worth noting as well is the fact that billings expanded 9% y/y to $1.59 billion, as shown in the chart below:

As seasoned software investors are well aware, billings often represent the better picture of forward-looking demand, as they capture multi-period deals signed in the quarter that will be recognized as revenue in future quarters. The fact that billings growth continues to exceed the pace of revenue growth is a signal that revenue isn’t set to decelerate, or may even see acceleration in the quarters ahead.

NetApp’s strength in orders is driven, in large part, by continued AI demand. And it’s not simply that NetApp is riding industry tailwinds that is benefiting all vendors, either – management notes that it believes the company is gaining share in the all-flash storage market. Per CEO George Kurian’s remarks on the recent Q2 earnings call:

Broad-based success across the portfolio propelled our all-flash array annualized revenue run rate to an all-time high of $3.8 billion, up 19% year-over-year, the fourth consecutive quarter of high-teens to low-20%’s annual growth. We continue to gain share in the all-flash market, far outpacing the growth rates of both the industry and all of our competition […]

Our AI business performed ahead of our expectations in Q2 with well over 100 AI and data-lake modernization wins. These wins span geographies and industries, with notable early momentum in public sector, manufacturing, financial services, healthcare and life sciences industries. We continue to advance our strong position with the development of GenAI cloud and on-premises solutions in partnership with industry leaders. GenAI is a truly hybrid workload and only NetApp has the breadth of products and services to reduce the complexity, resources, and risks across increasingly complex hybrid multi-cloud environments.”

The company added $0.4 billion in net-new ARR in the quarter, bringing its all-flash ARR to $3.8 billion, up 19% y/y.

We note as well that double-digit ARR expansion and AI tailwinds have also been accompanied by consistent margin expansion, helped by opex only increasing 2% y/y despite revenue growth that is four points stronger. The company boosted its pro forma operating margins by 180bps y/y to 28.6%, while pro forma operating profits rose 13% y/y in nominal terms to $475 million.

The lynchpin behind NetApp’s margin protection strategy has been to make strategic upfront purchases of its key raw input, SSD (or solid state drives). Rampant AI demand has driven double-digit y/y increases in SSD prices, but in spite of this, NetApp has been able to maintain its gross margins flat at 72%. By committing to SSD purchases in advance, NetApp is sacrificing near-term FCF and building up inventory, but protecting itself from future price spikes.

This strategy has proven solid in the past few quarters as SSD prices have risen. We do note, however, that major SSD supplier Western Digital (WDC) just recently reported a -6% sequential reduction in SSD ASPs per gigabyte in its most recent quarter, after three straight quarters of double-digit increases. NetApp may look to revise this strategy if SSD prices continue to stabilize, but for now, the company is still able to eke out respectable operating margin expansion leveraging this forward-purchasing playbook.

We note as well that NetApp achieved a true “beat and raise” quarter in Q2, with the company raising its full-year EPS guidance to $7.20-$7.40 (11-15% y/y EPS growth), from a prior view of $7.00-$7.20 (8-11% growth).

The company is also still maintaining its expectations of being able to deliver double-digit EPS growth throughout FY27.

Valuation and key takeaways

Despite these recent tailwinds, we find that NetApp still remains the cheapest of the managed storage-as-a-service vendors that are publicly traded in the markets. On both a revenue and EPS basis, NetApp trades several leagues cheaper than its direct competitors Nutanix (NTNX) and Pure Storage (PSTG), with its ~17x forward P/E also slightly cheaper than the broader S&P 500 despite the company’s commitment to double-digit EPS growth for the next three years.

Of course, there are risks to consider here. Storage has become a “commoditized” business, and as highlighted above, the company already has a number of direct competitors. Nutanix and Pure Storage are currently both growing their top lines at a faster pace than NetApp (though ARR growth at a ~20% clip is similar, and recall that NetApp management still asserts it’s gaining market share). There’s also a risk that the current mad dash to be AI-ready has pulled in a lot of data center and infrastructure investments into the current period, only for vendors like NetApp to see a more muted environment in the years ahead (thereby making its goal of double-digit earnings growth more challenging).

That being said, amid healthy operating margin expansion and reliable ~20% growth in ARR on top of a cheap P/E multiple, I see a very attractive risk-reward profile in NetApp. Stay long here and keep holding out for more gains ahead.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NTAP either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post NetApp: ARR Growth And Margin Expansion Should Drive Further Upside appeared first on Up2info.com.

• NetApp’s Q1 2025 earnings were underwhelming, but the company is evolving from traditional storage to “intelligent data infrastructure,” integrating with major cloud providers.
• The AFF A-series and AI investments are strengthening NetApp’s market position, though full transformation will take time.
• Valuation shows NTAP is mildly overvalued; profitability is solid, but revenue growth lags behind sector peers, raising concerns.
• Hold NetApp stock for now; profitability and strategic initiatives are promising, but economic risks and competition warrant caution.

Thesis

Back in August, when NetApp, Inc. (NASDAQ:NTAP) unveiled its Q1 2025 earnings, the market’s response was what I’d call tepidly sour—disappointed, but not a disaster.

The stock settled into a leisurely amble, channeling within a $115–$130 range. Fast-forward to today, and with FY25 Q2 results on deck (scheduled for release just after the close on Thursday), it’s time for another look. I’ll be going over some recent updates from the company, examining its guidance, valuation metrics, and any other data that might help us piece together what to expect later this week.

NetApp: A Seasoned Contender

When it comes to tech companies, NetApp, Inc. isn’t exactly the fresh-faced startup brimming with garage-band vibes. It’s a seasoned player in the data infrastructure game with a stock performance that backs up its success. Its growth and dividend returns have comfortably outpaced the broader market, with an annualized rate of return nearing 21% (dividends excluded), well ahead of SPY’s respectable but less dazzling 13%.

The company specializes in unified data storage and integrated data services. But at its core, NetApp offers a range of products that businesses rely on to keep their data in line and accessible. Think servers, SAN (storage area network) and NAS (network-attached storage) systems, networking hardware, and a well-stocked toolkit of software solutions.

But don’t tell NetApp’s CEO, George Kurian that.

In a recent interview, Kurian made it clear that he doesn’t want people to think of the company as just a hardware or storage provider anymore. While NetApp is still strong in the storage industry, the focus is shifting to something bigger: “intelligent data infrastructure.” This means they’re not just helping companies store data but are building smarter systems to make better use of it.

Businesses today, Kurian says, don’t just want storage; they’re asking for tools to analyze, optimize, and use data to improve how they operate and get real results for their business. One way to visualize this is like moving from just keeping books on a shelf to turning those books into actionable insights for better decisions.

To deliver on this vision, NetApp is putting a lot of effort into building software and tools that work really well with big cloud providers like AWS, Microsoft Azure, and Google Cloud. Again, these tools aren’t just about storing data—they’re designed to help businesses actually use their data in better ways. Kurian thinks this approach, which focuses on integration and smarter systems, will make NetApp stand out from competitors who, as he noted, are still stuck with older storage methods or a mix of solutions they’ve cobbled together from buying other companies.

Hardware and AI Investments

That doesn’t mean NetApp is ditching its hardware roots altogether. Far from it. Instead, it’s using its deep knowledge of data management to carve out a spot in the ongoing booming world of AI. Since AI thrives on two things—massive computing power and mountains of data—NetApp has joined forces with top Taiwanese manufacturers like Foxconn and Quanta, famous for their advanced servers. Together, they’re working on systems that blend cutting-edge hardware with NetApp’s data expertise, creating tools built to handle the intense demands of AI.

This mix of intelligent software and AI-ready infrastructure is, we’re told, a sign of NetApp’s thoughtful approach to the future. Kurian seems quite keen to emphasize that the company is evolving beyond the realm of traditional storage. But if their partnerships with hardware manufacturers are anything to go by, it’s clear that such a grand transformation doesn’t exactly happen with the snap of a CEO’s fingers. In other words, it’s going to take a fair bit of time and effort to fully pull off.

AFF A-Series Bolsters Market Position

Meanwhile, NetApp is doing well by broadening the range of products it offers. A big part of this success comes from their AFF A-series, which is an ultra-fast, all-flash storage system built for tough jobs like AI, machine learning, and managing large databases. It runs on their ONTAP software. The AFF A-series has been popping up across all sorts of industries where speed is the name of the game, supporting everything from virtualization to enterprise databases and AI applications. Management claims that by hitting both capacity and performance markets, NetApp has managed to firm up its market position, making high-performance storage a bit less of a luxury and more of a practical choice for companies looking to revamp their data setups.

Expanding Cloud Services

NetApp has also been improving its cloud services, making them better for handling hybrid cloud setups and AI tasks. The company had noted great progress in arenas like Asia-Pacific and Europe, where it’s seeing a steady flow of new customers. In fact, since last quarter, around half of its customers are either brand-new to NetApp or using flash storage for the first time, showing very good growth and momentum in its user base.

Tackling Competition and Cyclicality

As mentioned earlier, NetApp’s CEO talked about competition and how the company is holding its own in the market. In fact, according to discussions on last quarter’s conference call, they have been grabbing more market share in areas like capacity flash and block storage because some of their competitors have been slipping, especially in the high-end and mid-range products. On top of that, AI and its cousin, generative AI, are also opening up some big opportunities where NetApp finds itself in a great spot to handle the data needs for AI systems, and as AI keeps growing, so will the demand for flash storage. Things like generative AI and advanced models (like retrieval-augmented generation, or RAG) are going to need tons of storage, which could help NetApp improve its growth metrics, which I’ll get into in a moment.

Valuation and Growth Metrics

When it comes to valuation, NTAP is sitting at a blended price-to-earnings ratio of 17.21x, a bit above the fair value benchmark of 15.00x. In plain terms, this tells me that the stock is mildly overvalued compared to its usual historical averages. The likely culprit is a touch of investor optimism over the company’s adjusted operating earnings growth rate of 13.5%. Respectable, but not extraordinary for its sector.

Profitability and Forward Risks

Earnings-wise, NTAP delivers a decent EPS yield of 5.81%, which is a nice nod to its profitability that’s also echoed in Seeking Alpha’s A+ profitability grade. Concurrently, NTAP’s growth story leans on that 13.5% adjusted earnings growth rate. The company needs to keep this up and while management has been shrugging it off, I don’t think that competition in data storage and cloud markets will make it easy. In other words, its higher valuation only works if the growth holds steady. With a normal P/E of 14.45x, investors expect consistent results. A tougher economy could test those expectations.

Speaking of growth, NetApp’s SA Growth Grade of D- is telling us that the company has been struggling to keep up with its sector peers, especially in revenue and EPS growth.

Revenue growth is one weak spot with year-over-year growth that sits at 2.82%, trailing the sector median of 4.05%. Forward revenue growth projections look worse, showing a sector-relative drop of 50%. And even though NTAP’s revenue grew 429.37% over five years, the future looks flat.

On the flip side though, profitability growth is definitely solid with EBITDA growing 21.41% year-over-year, crushing the sector’s 2.4%. EBIT growth tells a similar story, with 24.86% growth against the sector’s 2.33%. Even looking forward, EBIT growth of 7.58% edges out the sector’s 7.27%. That noted, while it points to strong cost control and margin management, these gains don’t fully offset that slow revenue growth.

Guidance and Economic Concerns

Meanwhile, in regard to guidance, the company shared its outlook for the year, and their overall tone is one of confidence about how their business is performing, even though, to paraphrase, they mentioned that the overall economy is still a bit uncertain. Uncertainty aside, they’ve raised their revenue expectations for the year to between $6.48 billion and $6.68 billion, which would mean about 5% growth compared to last year. They also expect to keep their profits strong, with their gross margin staying at 71% to 72%. Their operating margin is also expected to hold steady at 27% to 28%. Looking ahead to the second quarter, the company expects revenue to be between $1.565 billion and $1.715 billion. Putting it all together, they estimate their earnings per share for the quarter will be between $1.73 and $1.83.

Q2 Watchlist for Investors

Finally, looking at what might impact the Q2 earnings, the company previously mentioned that broader economic and political issues are still ongoing, which could affect how much customers are willing to spend. On top of that, investors should watch for the slowdown in the U.S. public sector that management highlighted last quarter.

They talked about the market cyclicality and how they could be a problem. Analysts were also a bit twitchy that flash market growth might slow after several strong quarters, especially if tighter economic conditions hit spending. NetApp relies on strategic NAND pre-buys to keep margins up, but that’s risky. Once inventory runs low, margins could take a hit unless prices stay in their favor. Also, AI revenues, while hopeful, are still more promise than paycheck. Meanwhile, flash adoption is picking up speed, but traditional hard drives still hold the fort. The shift to new tech, as always, seems to be taking its time.

And lastly, while gaining some ground in the market, NetApp admits it’s facing stiff competition from the likes of Dell and HPE, particularly in the realms of flash storage and AI. The upshot here is pretty straightforward: staying ahead in this industry means relentless innovation and standing out from the crowd—exactly the sort of strategic juggling act CEO Kurian seems intent on mastering.

Final Take: Hold for Now

As we move into Q2, I’d say NetApp is worth holding on to for now. They’re doing well in terms of profitability and are making calculated initiatives into AI and cloud services, which could drive growth over time. That said, the stock seems a bit overpriced, their revenue growth is slower compared to competitors, and there are some risks tied to the economy and competition so it’s probably best to wait and see if they show more steady growth or the stock price becomes more reasonably priced.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NTAP either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post NetApp’s Q2 Earnings Preview: Profits, Partnerships, And The Path Forward appeared first on Up2info.com.

• I believe NetApp’s valuation at 17x forward non-GAAP EPS is attractive for a tech company with its growth potential.
• I’m impressed by the company’s focus on AI workloads, cloud integration, and flash storage, which are key growth drivers.
• NetApp’s ability to outpace the S&P500 since my initial bullish call further supports my confidence in its future performance.
• Despite a competitive market, I trust NetApp’s raised guidance and 15% EPS growth potential make it a worthy long-term investment.

Investment Thesis

NetApp (NASDAQ:NTAP) is a tale of two parts.

The bear case is rather straightforward. As we look ahead over the next twelve months, this is a tech company that is barely delivering mid-single growth rates. That’s never a good position for a tech company, as the multiple that investors are eager to pay can suddenly compress if a company is perceived to be a dead company walking.

That being said, the saving grace here is that investors are only asked to pay around 17x forward non-GAAP EPS.

Thus, as far as IT storage providers go, there’s little doubt that NTAP is attractively valued.

Rapid Recap

Back in March, I said,

[…] not only has NetApp reached record profitability, but it turns out that there’s still some growth left in this business.

Since I made that bullish call, NetApp has been a strong performer and nicely outpaced the S&P500. Now, looking ahead, I remain bullish.

Why NetApp? Why Now?

NetApp provides a comprehensive storage and data management platform, enabling businesses to manage and protect their data across diverse environments, from on-premise to cloud domains.

Their solutions, particularly in flash storage, help customers manage data efficiently for various applications, including mission-critical tasks.

NetApp’s value proposition lies in its ability to simplify cloud integration, AI workloads, and address complex data challenges, all the while providing flexibility to operations.

In the near term, NetApp is cautiously optimistic in its unique data infrastructure solutions, particularly as it raised its guidance for fiscal 2025 a smidge.

The company has experienced strong demand in key areas like all-flash storage, with notable wins in AI and cloud environments.

In sum, NetApp is well-positioned to continue to capitalize on cloud storage and flash market opportunities.

Given this background, let’s now discuss its fundamentals.

Revenue Growth Rates Continue to Tick Along

Allow me to provide further context. This is what I said in my previous analysis:

[…] given that the next couple of quarters’ comparables are very easy to compare against, this will allow NetApp to deliver close to double-digit growth rates all the way into fiscal H1 2025, simply from the business performing “as is”, without a lot of new customer growth.

Simply put, there’s a situation where the status quo will allow NetApp to shine, and for management to put forth an alluring turnaround narrative.

Fiscal Q2 2025 hasn’t yet been reported, but given management’s guidance, I believe that approximately 6% topline guidance, is approximately what we are likely to get.

Therefore, this means that my expectation for ”close to double-digit growth rates all the way into fiscal H1 2025” did not turn out as I forecast.

Therefore, to put it bluntly, this means that NetApp’s revenue growth rates are struggling against what was going to be an easy period for the company. And as it comes up against its most challenging period, we are going to end up with rather meek growth rates.

That’s the bear case, front and center. Now, onto the bull case.

NTAP Stock Valuation — 17x Forward Non-GAAP EPS

As an Inflection investor, it’s important to get a sense of the financial footing of the company you are backing. This takes a few minutes, you don’t need to be overly detailed. Simply put, is the company’s balance sheet an asset to your bull case or not?

Generally, I like to back companies that have a strong net cash position, where the net cash position reaches 10% of the market cap.

On this note, NetApp doesn’t fare strongly. More specifically, there’s approximately $600 million of net debt, which means that its net cash position stands at approximately 2% of its market cap.

Next, looking ahead over the next twelve months, it appears that NetApp is on a path towards approximately $7.50 of EPS. This consideration assumes that NetApp’s underlying profitability continues to outpace its topline growth, and grows by approximately 15% y/y, as a forward run-rate from fiscal Q2 2025.

This means that NetApp is priced at 17x forward non-GAAP EPS. This is not an excessive valuation, and it’s attractive enough, that keeps me bullish on this stock.

Investment Risks

The main risk here is the most obvious one, that I’ve discussed amply already. NetApp needs to convince investors that it has what it takes to continue delivering some topline growth into the back end of fiscal 2025, and into next year. If it fails to do so, then, investors are rapidly going to become anxious.

If investors become concerned over NetApp’s medium-term prospects, the stock will become highly volatile, and the smooth sailing that investors have had since I made my bullish call, will turn into a stock that is not ”for the faint-hearted”.

What’s more, keep in mind that NetApp operates in a highly competitive sector, particularly in storage and cloud services.

While the company continues to capture market share in flash storage and AI solutions, it also faces stiff competition from hyperscalers in public cloud and data management services, with the obvious names being Amazon’s AWS (AMZN) and Microsoft Azure (MSFT), but there’s plenty more too.

This will continue to impact NetApp’s near and medium-term growth prospects.

The Bottom Line

NetApp presents a compelling investment opportunity right now due to its reasonable valuation and steady growth potential.

At 17x forward non-GAAP EPS, the stock offers an attractive entry point, especially considering its focus on profitability and the potential for 15% EPS growth.

While its revenue growth may not be stellar, NetApp’s position in flash storage and cloud integration positions it to capitalize on key trends in AI and data management.

The company’s cautious optimism for fiscal 2025 and its raised guidance indicate that it can navigate the competitive landscape and continue to deliver value to shareholders.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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The post NetApp: Why Investors Should Remain Bullish For Fiscal 2025 appeared first on Up2info.com.

• NetApp has benefited from a surge in AI infrastructure spending, helping push its billings growth rates to the double digits.
• The stock has risen ~40% year to date in response to renewed growth trends. But in spite of the YTD rally, the stock is still reasonably valued at ~16x forward P/E.
• Despite already closing AI deals today and having many exploratory AI conversations with its customer base today, company leadership believes the bulk of opportunity is still ahead.
• With just under a 2% yield and cheap multiples, this is a great “growth at a reasonable price” AI stock to invest in.

With the S&P 500 sitting near all-time records, it’s well recognized that beyond the recent rate cuts, the other major driver to move the markets this year has been excitement over the prospects of AI to revitalize a tectonic new shift in the technology industry. AI is slated to touch many aspects of modern business, but many of the core software names that have direct exposure to AI (such as Palantir (PLTR)) have already shot up tremendously and are sitting at expensive valuations. Many value investors are wondering: are there any stocks tangential to AI that still trade at decent value?

NetApp (NASDAQ:NTAP), in my view, is a great answer to that query. This storage software vendor, which for many years had seen staid growth rates as its industry grew to be commoditized, especially with much more competitive players in the flash storage space, has seen AI interest rekindle its sales. Year to date, shares of NetApp have jumped ~40% on the renewed growth trends: but in my view, there’s still plenty of room for NetApp to rise further.

A great price today for tremendous AI spending opportunity in the near future

I last wrote a bullish note on NetApp when it was trading below $70, in 2022. Now, with the AI opportunity coupled alongside strong sales execution in the flash storage segment, I’m renewing my buy call on NetApp.

One of the key realizations to make in the AI space (and one that also props up my strong buy rating on raw memory manufacturer Micron (MU)) is the fact that AI models function by gorging on vast amounts of data. AI, in particular, relies heavily on unstructured data: that is, data like free-form internet responses and videos that may not neatly stack in rows and columns, which is what’s often referred to as tabular or structured data. And so the race to build and deploy AI applications often starts with setting a solid data foundation, for which vast amounts of storage are needed.

NetApp is a beneficiary of this surge in infrastructure spending to support AI models. The chart below shows NetApp’s competitive advantages in AI: in short, the company already operates massive data lakes for major corporations, and it’s helping many of its customer retrofit these data lakes to be digested by AI models.

Hunger for unstructured data storage has already revitalized NetApp’s growth rates, but unlike many of the hotter trades in the AI sector, NetApp still trades at a very cheap valuation today – even in spite of its YTD rally. In my view, the best advantage to investing in NetApp is its very modest valuation against bottom line results. Despite strong growth rates and sky-high software margins, NetApp is valued essentially no better than a typical manufacturing concern – even after this year’s generous rally.

At current share prices near $121, NetApp trades at a market cap of $24.83 billion. After we net off the $3.02 billion of cash and $2.39 billion of debt on NetApp’s most recent balance sheet, the company’s resulting enterprise value is $24.20 billion.

Meanwhile, for FY25 (the year for NetApp ending in April 2025), the company is guiding to $6.48-$6.68 billion in revenue, and $7.00-$7.20 in pro forma EPS.

And for next year FY26, consensus is pointing to $6.93 billion in revenue (+5% y/y) and $7.59 in pro forma EPS (+7% against this year’s midpoint). This puts the stock at valuations of:

• 3.7x EV/FY25 revenue and 3.5x EV/FY26 revenue
• 17.0x FY25 P/E and 15.9x FY26 P/E

Given the S&P 500 is still trading at 20x earnings multiples against calendar 2025 estimates, I’d say NetApp offers a great trade-off between decent earnings growth power plus a reasonable valuation entry point.

In my view, if investors are looking for an AI play that still combines a “growth at a reasonable price” investment philosophy, NetApp is a fantastic choice.

Q1 download

Let’s now go through NetApp’s latest quarterly results to emphasize further how the company has revitalized its performance amid its new AI growth catalysts. The fiscal Q1 (July quarter) earnings summary is shown below:

NetApp’s revenue grew 7.6% y/y to $1.54 billion, surpassing the midpoint of the company’s initial (and rather wide) guidance range of $1.455-$1.605 billion, or 1.6%-12.1% y/y growth.

That wide initial guidance range is a reflection of how unpredictable the demand environment is currently, with large AI drivers tempered by a softer macroeconomy in which many IT leaders are pinching their budgets. And while ~8% top-line growth doesn’t sound immediately impressive, there are two things to consider. First, over the past two years, NetApp didn’t deliver any growth at all: in fact, FY24 revenue declined -1.5% y/y, while FY23 grew only 0.7% y/y.

Second: NetApp delivered Q1 billings of $1.45 billion, up 11.5% y/y. As a reminder, for recurring-revenue businesses like NetApp, billings is a great indicator of forward-looking demand as it represents deals signed in the quarter that will be recognized as revenue in future quarters. Stronger billings is a potential indicator that revenue might be tipped to accelerate as well.

NetApp management still believes the bulk of the AI-related growth acceleration opportunity lies a bit in the future. However, the company is still noting strong current customer momentum with AI-related deals: signaling future growth may surpass today’s as well.

Per CEO George Kurian’s remarks on the recent Q1 earnings call:

AI is the cornerstone of many of my customer conversations, reinforcing NetApp’s position as a proven data infrastructure platform provider and thought leader in this space. Customers are selecting NetApp as their partner at every stage of the AI lifecycle because of our high-performance all-flash storage, unique cloud integration, and extensive data management capabilities. These capabilities support a wide range of needs, from data preparation, model training and tuning, to retrieval-augmented generation, or RAG, and inferencing, and address the requirements for responsible AI, including model and data versioning, as well as data governance and privacy.

While we believe the large opportunity for enterprise AI is still ahead of us, we are seeing good momentum today, with our AI business performing well ahead of our expectations. In Q1, we had over 50 AI and data lake modernization wins. I’ll give you just a couple of examples. We were selected by another of the world’s largest oil and gas companies for their AI and high-performance compute workloads. Our all-flash storage will power the customer’s AI environment, servicing more than 40,000 CPU cores and GPUs, which run simulations and 3D virtualization workloads.”

Beyond reinvigorated growth, the company has also achieved significant profit growth. As shown in the chart below, pro forma operating profits rose 29% y/y to $399 million.

This represented a 25.9% margin, 430bps higher y/y. 160bps of the margin expansion came from a richer gross margin profile, as the company achieved a higher-margin revenue mix alongside strategic bulk buys of raw SSD memory that has helped to lower costs. The remainder of the margin expansion came from operating efficiency, as OpEx rose only 2% y/y (versus an 8% top-line growth pace).

Risks and key takeaways

In spite of NetApp’s many timely strengths, we shouldn’t be blind to the longer-term risks that this stock poses. For one, the macro IT buying environment remains unsteady: hence the wide ranges that NetApp is guiding to in its forward quarter, signaling that we may see some very lumpy quarters ahead. And in the long run, while infrastructure players like NetApp are capturing a lot of early preparatory spend in AI, infrastructure and storage tend to be commoditized (think of semiconductors and chips in general) while AI software applications will be the true differentiators. NetApp is hardly alone in its industry, facing competition from the likes of HP Enterprise (HPE) and Pure Storage (PSTG). Right now, there’s enough AI enthusiasm and early investment into infrastructure fueling growth for all parties, but this may not be the case for an extended period of time.

Still, NetApp’s acceleration to double-digit growth in billings in the early innings of AI spending signal that the company has a multi-year expansion trajectory ahead. And with a cheap below-market P/E ratio plus a ~1.7% current dividend at current share prices ($0.52 in quarterly yield, or $2.08 annually) – I’d say there’s both enough valuation buffer and income incentive to keep us invested in NetApp. Stay long here and keep riding recent momentum upward.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NTAP either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post NetApp: Trading At Great Value Despite AI Tailwinds appeared first on Up2info.com.

• We’re downgrading NetApp to a hold as the positives from the memory/storage recovery are already priced in, with the stock near historical highs.
• We don’t see any near-term catalyst at play to boost top line growth, and hence we see a higher risk profile for NTAP in the 2H24.
• We recommend reducing exposure to memory/storage names as the recovery appears fully priced into the peer group.
• NTAP is relatively cheap compared to peers, but near-term risks and lack of catalysts suggest it won’t outperform the S&P 500 in 2H24.

We’re downgrading NetApp (NASDAQ:NTAP) to a hold as we think the positives from the memory/storage recovery have been priced into the stock, with the stock valued near historical highs. We last upgraded NTAP to a buy when the stock was trading at $91 per share last December; now, the stock is trading at $120 and reached a high of ~$135. We think our positive thesis of NAND flash strength and demand recovery played out, driving NTAP’s outperformance over the past three quarters. Over the past four quarters, NTAP has beaten EPS estimates three times, and revenue estimates four times at the same time that memory prices recovered in 1H24, confirming our belief that the positives from the demand-supply regaining balance and price recovery have been priced into the stock. We downgraded Micron (MU) earlier this month, and now NTAP follows.

We’re recommending investors reduce exposure to memory/storage names in the back end of the year, as we believe the memory/storage recovery has been priced into the peer group. Trend Force actually reported in late June that “NAND Flash prices saw a robust rebound as manufacturers kept production in check during the first half, helping them regain profitability.” This statement is later followed by, “However, with a noticeable ramp-up in production and sluggish retail demand, wafer spot prices have dropped significantly. Some wafer prices are now over 20% below contract prices, casting doubts on the sustainability of future price hikes.” We’re more conservative on NTAP in 2H24, as we don’t see any clear near-term catalysts for end-demand recovery. Hence, we see a limited upside surprise from NTAP.

1Q25 Review & 2Q25 Preview

NTAP’s business is that it “provides a wide range of storage-related products and services for storing and managing data both on-premises and in the cloud,” with major exposure to the Flash market. The company reported its first quarter of FY2025 earlier this week, announcing revenue of $1.54B, slightly beating consensus at $1.53 and adjusted EPS of $1.56 versus consensus of $1.45. Management now guides for revenue of $1.57B to $1.72B in Q2, compared to a consensus of $1.62B. Investors didn’t react too well to the results in spite of management increasing FY revenue and profit guide to the range of $6.48B-$6.68B for FY25 revenue, compared to a consensus of $6.55B. Net revenue came in at $1.54B for the quarter, ahead of $1.43B in a year ago quarter, representing an 8% Y/Y increase, and billings were up 11.5% Y/Y to $1.45B but noticeably down from $1.8B in 4Q24.

For the quarter, NTAP reported hybrid cloud revenue of $1.38B and public cloud revenue of $159M, both up Y/Y but with the former down Q/Q from $1.5B last quarter. The focus is really on the all-flash ARR, which was up 21% Y/Y to 3.4B but down from $3.6B a quarter prior in spite of the introduction of the “new AFF A-series family of high-performance all-flash arrays” used on GenAI workloads. The company is maintaining strong margins near all-time highs, with 1Q25 consolidated gross margins coming in at 72%, and is guiding for Q2 consolidated gross margin to be 71% to 72%. We emphasize management’s outlook on the stock because we think it’ll help determine whether the company outperforms or does not, depending on how high expectations are. Our previous positive sentiment on NTAP played out so well partially because of the conservative outlook for the company; now we’re seeing an opposite scenario where expectations are higher, but the likelihood of an end-demand environment that can support the outperformance is lower.

The following chart outlines NTAP’s results and guidance from 1QFY25.

Additionally, NTAP derives a little over half of its total revenue by geography from the Americas, making it more sustainable in the U.S. end-demand environment. We think it’ll be at least three quarters after the Fed’s potential interest rate cut that we’ll see a healthier end-demand environment materialize.

Valuation & Word on Wall Street

NTAP is relatively cheap compared to the peer group. On a P/E basis, the stock is trading at 17.5x C2024, compared to a peer group average of 32.2x and a ratio of 15.3x when we last wrote on the stock in December. The EV/Sales ratio is more similar to that of NTAP trading at 3.7x C2024 versus a group average of 7.5x and a previous ratio of 3.0. We don’t think this valuation is a bargain for the stock’s near-term risks. We recommend investors stay on the sidelines because we don’t see the stock outperforming the S&P 500 in the second half of the year.

The following chart outlines NTAP’s valuation against the peer group average.

Wall Street shares our more cautious sentiment on NTAP. Of the 21 analysts covering the stock, six are buy-rated, 14 are hold-rated, and the remaining one is sell-rated; interestingly, this is the exact same as it was at the time of our December note. Turning to the sell-side price targets, the stock is priced at $120 per share, with a median and mean price target of $130 for a potential 8% upside.

The following chart outlines sell-side ratings and price targets on the stock.

What to do with the stock?

We expect NTAP to have a limited near-term upside and hence recommend that investors stay on the sidelines into 2QFY25. We think the stock will be an in-line performer. We believe that what management referred to on the call as the “rate of innovation in the software applications that drive AI” remains intact, the AI TAM opportunity is growing, and NTAP’s all-flash portfolio is well positioned within it. Our concern is about a lack of a near-term catalyst to support outperformance in 2H24, considering the positives of the recovery got priced in, recognized by the raised outlook and stock price over the past three quarters. We recommend investors stay on the sidelines until we see a turnaround in spot prices, which may happen towards mid-2025 as industry revenue from NAND flash is expected to grow 29% in 2025, reviving capex and cost pressure. We’ll change the stock back to a buy once we see the price data points to support the next leg of outperformance.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• NetApp, Inc. trading around fair value, hold recommendation justified.
• Strong fundamentals, innovative attributes, but not undervalued anymore.
• Technical analysis shows potential for more capital gains, but limited upside due to overbought conditions.

Investment Thesis

I recommend holding NetApp, Inc. (NASDAQ:NTAP) because it is trading around its fair value. In my previous bullish thesis, I recommended a buy decision guided by my estimated fair value of $129.67 alluding to a 20% margin of safety. Since that publication, the stock has exploited that runway and rose as high as $135.01 before dropping slightly to its current price of $126.15. This implies that the stock is trading within its fair value, where a hold decision is justified.

While my previous bull thesis was anchored on innovation, NTAP is maintaining its innovative attribute, which bodes well for its future sustainable growth. Its fundamentals are also robust, with a very attractive profitability and balance sheet.

With a total debt of $2.65 billion and total cash of $3.26 billion, it has net cash of $0.61 billion, speaking volumes on the strength of its balance sheet. On the other hand, its cash flows are very solid with an operating cash flow of $1.68 billion, which is enough to cover its total debt by 63.4%. The CFO has a YoY growth rate of 52.21% compared to the sector median of 19.06% indicating that NTAP has a healthy financial status and therefore can sustain its operations. In a nutshell, its fundamentals are strong and attractive. Despite how attractive this company looks, it’s not undervalued anymore, and therefore a hold rating is warranted.

Technical Approach

Now that the stock is trading close to its fair value, let’s examine the charts to determine the outlook. Since May 2023, NTAP has been on an uptrend, as shown by the blue trend line on the chart below. Recently, it hit its 52-week high of $135.01, and it has since been on a downtrend. However, I find four major pivot points for this stock, with two support zones at about $109.6 and $119.1. Further, it exhibits two major resistance zones at about $141.1 and $134.8, respectively.

Looking at the established pivot points, it is apparent that the stock is likely to form a new higher high and a new higher low, an indication that the uptrend may continue above the fair value translating to more capital gains for current investors.

Looking at the RSI, it is at 73.5 which is in the overbought region, meaning that the stock has a limited upside potential, which explains why the highest resistance point is not very high. Above all, given that trading volume is essential in determining the outlook of a stock, NTAP had exhibited a rising OBV which appears to be peaking now, meaning that what had been an incremental cumulative trading volume is cooling, and therefore the upward momentum could be losing steam at least in the short run.

In conclusion, NTAP has been on an upward trajectory which has led the stock in the overbought region where the upside is limited. Although there are signs of a potential for some more capital gains as shown by the pivot zones, the declining OBV indicates that the upward momentum may be losing steam. Given this mixed outlook, I recommend a hold decision as we wait for the price movement perhaps at the pivot points.

Current Affairs: NTAP Keeps Innovating

In my previous coverage, I extensively covered NTAP’s innovativeness, especially in cloud computing where I discussed some of its key products such as Amazon FSx for NetApp, and Blue XP among others. Since my last coverage, the company has made some strides forward on the innovation front. NetApp is introducing new capabilities to help with the advancement of intelligent data infrastructure installations that better support strategic workloads such as GenAI and VMware environments. These features include:

NetApp GenAI Toolkit for Microsoft Azure NetApp Files Version: Customers can now incorporate private enterprise data stored in Azure NetApp Files into retrieval-augmented generation (RAG) operations in a secure, automated manner. By merging private data with pre-trained, foundation models (FMs), GenAI projects can produce more distinctive, high-quality, and ultra-relevant results. The combination of the NetApp GenAI Toolkit with Azure NetApp Files creates a powerful synergy that enables clients to leverage sophisticated language generation capabilities.

BlueXP Workload Factory (for AWS): For critical workloads like GenAI, VMware cloud environments, and business databases, this intelligent data infrastructure service automates the planning, provisioning, and management of cloud resources and services using established industry best practices. Utilizing BlueXP Workload Factory, customers can maximize the deployment time, cost, performance, and resource protection for strategic workloads and the data that goes along with them. BlueXP Workload Factory enables customers to profile infrastructure requirements for target workloads and compare various resource options for cost and performance needs, hence simplifying workload migrations to the cloud. Subsequently, the service can allocate the designated resources, transfer any current workload data to these freshly allocated cloud installations, and continuously enhance the complete setup to guarantee the necessary cost and performance objectives.

Amazon FSx to Improve NetApp ONTAP: With improved scalability and flexibility features, AWS unveiled the next-generation Amazon FSx for ONTAP cloud storage solution, which can support up to 6 GB/s of throughput for a single highly-available [HA] pair using 512 TiB of SSD storage. With a 300 percent improvement in network burst throughput and a 150 percent boost in disk burst throughput, next-generation file systems provide virtualized applications with greater growth room. Second-generation Amazon FSx for ONTAP systems allows dynamic scalability by adding HA pairs as needed, up to 24 nodes, enabling large-scale, high-performance workloads like GenAI. This gives 1 PiB of SSD storage the capacity to transfer up to 72 GB of data per second, offering increased performance and flexibility for changing business requirements.

These upgrades expand on NetApp’s current product line, which supports data operations and storage for clients who need to set up and oversee highly capable, strategic workloads like VMware and GenAI systems. For instance, NetApp recently revealed that all of its customers would now be able to utilize its exclusive BlueXP data classification feature, which automatically classifies and categorizes data for improved governance and secure ingest into GenAI and RAG data pipelines. This feature is now a core control plane capability and is free of charge.

My Take On The Innovative Upgrades: What Does It Mean?

In light of the above significant progress in innovation, NetApp is positioning itself to better support data-intensive workloads and make the management of these workloads across hybrid multi-cloud environments simpler by introducing services like the GenAI Toolkit for Microsoft Azure NetApp Files and the NetApp BlueXP Workload Factory for AWS. Given the strong predicted growth in cloud computing, which is estimated to grow at a CAGR of 21.2% between 2024 and 2030, I believe this will earn NetApp a significant market share in this projected growth.

In terms of competitiveness, NetApp distinguishes itself by providing AI-driven data storage solutions that include comprehensive security and protection. Leading analysts have recognized its leadership and innovation in data management, providing it with a competitive advantage. The company’s hybrid multi-cloud management approach, as well as its ability to simplify numerous settings, may help it differentiate itself from competitors.

NetApp’s earnings and revenue are expected to grow by 9.7% and 4.4% per year, respectively. The EPS is projected to grow at an annual rate of 8.5%, with a return on equity of 72.4% in three years. These estimates indicate an optimistic future for NetApp’s growth, implying that the company’s strategic innovations may result in greater market share and profitability in the cloud services arena.

Calendar: Near-term Catalyst Expected On 28^th August

Looking at the company’s calendar, the nearest catalyst is its Q1 2025 earnings report expected on 28^th August 2024. Looking at historical data, the price has been responsive to news and events especially earnings reports which makes this upcoming event significant. In my view, should the report reveal solid performance, I expect the market to respond positively pushing the price slightly higher and vice versa.

Where The Rubber Meets The Road

In summary, despite the cutting-edge innovations, solid fundamentals, and bright outlook in financials, NTAP has realized its fair value warranting a hold rating. My rating matches the consensus recommendations of 19 other analysts who have an average price target of $127.54 which is slightly below my estimated fair value of $129.67. This tells us that indeed this stock is trading within its intrinsic value justifying a hold decision.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• NetApp stock has outperformed the S&P 500 by 40.8% over the past year.
• The company is at the forefront of intelligent data infrastructure and offers sustainable growth potential.
• NetApp has a strong financial health, innovative market position, and promising growth potential, making it a good investment opportunity.

Investment Thesis

NetApp (NASDAQ:NTAP) stock has gained about 67.03% over the last year, outpacing the S&P 500 by a margin of about 40.8%.

While this solid performance could be attractive to investors, I believe we ought to be rational enough before making any investment based on this past performance alone.

In the wake of the evolving IT industry, I believe investors should invest in companies that not only lead in innovation but also offer sustainable growth potential. With this background, I am bullish on NTAP since it’s at the forefront of intelligent data infrastructure characterized by an innovative market position. Additionally, the company has a compelling growth potential and robust financial health, which adds to my bullish stance. For these reasons, I believe this company is a good investment opportunity and rate it a buy.

Company Overview

NTAP is a global company specializing in intelligent data infrastructure solutions. It was founded in 1992 and has been a pioneer in providing unified data storage, integrated data services, and CloudOps solutions to its customers. Its portfolio is made up of three major components. First is unified data storage, which offers the flexibility to store any data type and run any workload across various environments. The second one is the integrated data services which provide cyber resilience, governance, and application agility to create the most value for data. Lastly is the CloudOps solution. This utilizes AI-powered optimization to maximize the performance and productivity of cloud and on-premises infrastructure.

The company operates through two major segments whose revenue distribution is as shown below.

The company has been listed in the Fortune 500, and it continues to influence the data management industry with its innovative approach to handling data in the cloud era.

Innovative Market Position

Over the years, NTAP has acquired itself a niche as an intelligent data infrastructure company. The company offers a very unique silo-less approach that combines unified data storage with enterprise-grade storage services natively embedded in the world’s largest cloud. Let’s dive deeper into the company’s innovativeness and look at two examples of its unique products. The first example I will consider is the Amazon FSx for NetApp ONTAP service. It is a fully managed multi-protocol storage service that enables organizations to extend their on-premises data onto AWS for enhanced data protection, as well as migrate organization workloads without refactoring and running stateful Kubernetes applications.

This innovation is very unique in that it combines NetApp’s ONTAP features with the flexibility and scalability of AWS. The product appeals to many customers because it addresses some unique customer needs, some of which I will highlight. To begin with, it addresses the need for high-performance and multi-protocol storage. This is possible because it offers high-performance file storage that is accessible from Linux, Windows, and MacOS compute instances via several protocols such as NFS, SMB, and iSCSI. The multi-protocol access allows for a broad range of applications and use cases. The other customer need addressed by this product is the data management capability. Given its features like snapshots, clones, and replication; customers can manage their data effectively. For instance, the FlexClone feature allows for instantaneous point-in-time cloning of volumes, which is particularly useful for testing database operations before executing them in production environments. Another unique need addressed by his product is seamless data migration. With the integration with NetApp SnapMirror replication, it enables easy and efficient migration from on-premises ONTAP deployments to the AWS cloud. These are just a few examples of how this unique offering is addressing unique and diverse customer needs. As I conclude with this first example, I will mention one of its advantages, which is cost effectiveness. This product supports compression and deduplication, which can reduce storage costs by eliminating redundant files and minimizing storage overheads.

The second innovative product is the NetApp BlueXP which is a comprehensive data management solution designed to provide unified control across hybrid multicloud environments. The product is unique in that it can offer a single point of control for storage and data services, which supports an intelligent data infrastructure. For this article, I will just mention two of its many unique features. To begin with is its unified control across environments. It delivers a consistent management experience for storage and service for all data, be it on-premises or spread across multiple cloud platforms. The other unique feature is its powerful AIOps capability. BlueXP simplifies operations by offering actionable insight and automation through AI-driven operations, which helps to manage the complexity of today’s data infrastructure.

Through its innovative product which is unique and very relevant in the dynamic tech industry, especially in the wake of AI adoption, NTAP has earned itself a leading position in the industry. According to Frost & Sullivan, NTAP will be the leading company for hybrid cloud storage management in 2024. For the Q3 2024, NTAP reported a revenue of $1.46 billion, which was an improvement from $1.38 billion in the previous year. I expect this trend to continue given that the company is projected to deliver a revenue of $1.66 billion in the current quarter, marking a growth of 5.1%. Given that the hybrid cloud contributes more than 91% of the total revenue, I expect it to contribute about $1.51 billion this quarter, which would be a significant improvement.

It is estimated that 88% of enterprises will adopt a hybrid cloud and 83% of those live in a hybrid multi-cloud world. This implies that NTAP’s products are in demand, given the projected high adoption. Further, according to precedence research, the global cloud service market is projected to grow at a CAGR of 17.105 between 2023 and 2032.

In my view, this projected growth in a dynamic industry offers NTAP opportunities to keep innovating, something I believe will serve as a major growth catalyst.

Financials

Looking at the company’s financial performance and balance sheet, its financial health is very robust. First off, since 2021, NTAP has consistently grown its top and bottom lines, translating to a robust and resilient performance amidst several macroeconomic headwinds. The company grew its revenue from $5.74 billion in 2021 to $6.36 billion in 2023. Similarly, its operating profit and net margin improved from $1.18 billion and 12.71% respectively in 2021 to $1.54 billion and 20.03% in 2023. Further, in the MRQ (Q3 2024 report dated 29^th February 2024), the company maintained its solid performance. It reported revenue of $1.61 billion, marking a growth of 5.24% YoY. Over the past three quarters, the company’s revenue has been growing consistently from $1.43 billion in Q1 2024, $1.56 billion in Q2 2024 to $1.61 billion in Q4 2024.

Its EPS came in at $1.94 beating estimates by $0.25. Given the company’s strong financial performance, it has become a top dog compared to its peers in profitability, as shown below.

In my view, its outstanding profitability is a reflection of the company’s efficiency as well as effective cost management, which makes it an attractive opportunity for profit-oriented investors.

Besides the solid financial performance, the company’s balance sheet is very strong. With a total debt of $2.66 billion, the company’s cash of $2.92 billion can pay the total debt, something which speaks volumes on the company’s strong liquidity and deleveraged status. Further, given the company’s total assets of $9.37 billion cover the total debt more than 3.5x, this affirms that this company is highly deleveraged and that it has minimal debt risk. Most interesting, the company has interest coverage of more than 22x. This shows the company’s solid position to meet its financial obligation. Additionally, the company has strong cash flow generation ability, as shown by its trailing operating cash flow of $1.31 billion.

In a nutshell, NTAP has a very healthy financial status which translates to strong fundamentals which more often result in bullish sentiments. In addition, its strong balance sheet serves as a buffer against economic uncertainties, and it also offers the company financial flexibility to invest in growth opportunities. Lastly, this solid financial footing instills confidence in investors and this could result in high demand for the stock, resulting in a high valuation.

Growth Potential

The company’s growth estimates promising with both EPS and revenues projected to grow by 2027. Below are the projected values by 2027 of both EPS and revenue.

These figures are very attractive when viewed in isolation, but it would be more interesting to assess the company’s potential to meet these projections. One way to evaluate the company’s ability to achieve these figures is through examining its history of beating its estimates. Based on this criterion, NTAP has a high potential of beating these estimates given its strong record of beating estimates over the last couple of years. Since 2020, the company has beaten or at least achieved both its EPS and revenue estimates consistently, something which instills confidence that it will achieve and more likely surpass the projected future growth figures. Below is its earnings surprise history.

Above all, given the strong projected market growth and the company’s innovative and leading market position, I believe NTAP is in a good position to achieve its growth ambitions by leveraging the market opportunities with its diverse and unique products and services. A good example is its innovation in all-flash array storage solutions, which the company reported a significant 21% YoY growth in its all-flash array annualized revenue rate, reaching $3.4 billion.

Valuation

To value this company, I will use both relative valuation metrics and a dcf model. For the relative valuation, NTAP is trading at a trailing GAAP PE of 24.75which is a 16.34% discount compared to the sector median PE of 29.58. This indicates that NTAP is undervalued. To support this, I ran a dcf model with several assumptions. First off, I assumed a growth rate of 3% which is conservative given the company’s 3-year FCF CAGR of 4.74%. The conservative figure is aimed at mitigating the major drawback of a dcf model, which is overreliance on assumptions. Further, I used a discount rate of 9.2% which is the company’s WACC as shown below.

Given these assumptions and using the trailing FCF/share of $5.51 as my base case, below is my model output.

Based on my model, I arrived at a fair value of $129.67 which translates to a discount of about 20%. This implies that this stock is undervalued with double-digit upside potential. For this reason, I recommend this promising stock to potential investors at a discount.

Risk

Just like any other investment, investing in this stock has its share of risks. One of the major risks of investing here is its reliance on the hybrid cloud for the majority of its revenue. As presented earlier in this article, this segment contributes more than 91% of the company’s annual total revenue. This implies that this company is exposed to a great risk should this market segment face an economic downturn or in case competitors introduce a superior product that can eat into NTAP’s market share.

Another risk is technological changes. The tech industry is evolving very fast and that means that NTAP should continuously innovate to stay relevant, failure to which it could be detrimental. As a result, investors should keep a close eye and how the company is adapting to emerging trends to meet emerging consumer needs.

Conclusion

In conclusion, NTAP is a promising investment opportunity given the company’s innovativeness and market leadership. Its profitability is very attractive, and its financial footing is very solid. Given its growth potential and undervaluation, I believe the future is bright and as a result, I rate it a buy.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post NetApp: An Innovative Tech Stock appeared first on Up2info.com.

• NetApp’s stock reaches a new high, driven by optimism about opportunities in artificial intelligence.
• This contrasts with what analysts predict as topline estimates for the fiscal year which ends in April this year, and there is also competition for AI-ready storage.
• On the other hand, margins are on the rise and it should benefit from sales of higher-performance disks as corporations try to match the speed of their storage with Nvidia’s accelerator GPUs.
• In this respect, the company benefits from a huge installed base.
• There are short-term volatility risks but the company should be a longer-term beneficiary of artificial intelligence.

NetApp’s (NASDAQ:NTAP) stock has reached a new high of $109, last reached in October 2000. This was after an 18% upside at the end of February after its CEO expressed optimism about opportunities in artificial intelligence during the earnings call for the third quarter of fiscal year 2024 (Q3). It is now trading at a forward price-to-sales multiple that exceeds the median for the IT sector by nearly 27%.

However, analysts’ estimates for FY’24 point to a revenue decline of 1.7% which leaves doubt about its ability to harvest gains related to intelligent apps in the short term.

Therefore, amid all the AI frenzy, this thesis aims to realistically assess opportunities and show that NetApp should instead emerge as a long-term AI beneficiary. For this purpose, I highlight AI readiness, look into the competition, and show it is prioritizing margins.

First, I provide insights into how this company primarily known for its storage can benefit from the emergence of intelligent applications enabled by Generative AI.

The Data Dimension and AI Readiness

From being a storage provider that popularized the NAS (network attached storage) concept in 2002 which made it possible to bypass the need for a server, NetApp has evolved into more of a data infrastructure company. As such, it has positioned itself as a key storage player in the hybrid cloud environment, enabling corporations to manage data lying both on their premises and in any public cloud with relative ease.

Making the connection with the AI world, the development of intelligent applications like ChatGPT require software algorithms to feed on data, lots of them, but the challenge is that not all of it is located in the same place. In other words, they are siloed. This is occurring at a time when businesses have become data-driven as managers and CEOs rely on information about sales outlook or real-time production capacity to drive their businesses, with the amount of data generated continuing to increase at a frantic pace.

This is where NetApp’s tools become handy for making the data rapidly available for processing, and, with its ability to work with partners, it developed ONTAP AI in 2018, which integrates Nvidia’s (NVDA) DGX systems with its all-flash storage. By being connected to the cloud, the objective is to streamline and aggregate data from the edge to the cloud core to deliver analytics-based applications as part of machine learning, an older flavor of AI.

This was well before the advent of ChatGPT in November 2022 but since the partnership has evolved rapidly with Nvidia’s NeMo Retriever, a set of Gen AI microservices intended to enable organizations to connect their language models to leverage their unstructured data (or documents, images and videos) and rapidly get started in their AI journeys, while also not having to spend much.

Gen AI and the Competition

Noteworthily, as a storage company, the objective behind these partnerships is to capitalize on the AI trend to sell more hardware. In this respect, companies that originally considered flash only for high-performance workloads are currently rethinking what they use as primary storage. Hence, instead of using lower-speed hard disks which may cause bottlenecks and prevent them from benefiting from the full power of Nvidia’s accelerator GPUs, it may be better to opt for flash. For this purpose, it introduced the NetApp AFF C-Series QLC all-flash storage in October 2023.

However, as per NetApp’s CEO during Q3’s earnings call, another vendor is also positioned in QLC-based all-flash arrays. Looking across the industry, I noticed Pure Storage (PSTG) with its Flash Array //C introduced around the middle of last year. Furthermore, Gartner’s magic quadrant for 2023 shows other major companies like HPE (HPE), Dell (DELL), and International Business Machines (IBM) are already well positioned in the crowded leadership quadrant as shown below. Given their scale, they could rapidly enhance their products to be AI-ready, either through R&D or acquisitions.

Therefore, the company does not benefit from the near-monopolistic demand conditions as Nvidia for its H100 GPUs. This is why I believe the price surge is not justified, and, in case it does not deliver on AI expectations, expect volatility risks. Moreover, while the management talks about “an expanding range of AI opportunities worth tens of billions of dollars for RAG or Retrieval Augmented Generation, there is no mention of an AI-specific pipeline.

For investors, RAG is cutting-edge and can be viewed as augmenting what an LLM is capable of, by accessing knowledge bases that lie beyond its training data sources, but there is no precision as to a timeline for the opportunities. In this respect, according to research firm Gartner, companies are more likely to plan Gen AI spending this year rather than spending money on the technology.

Still, I am not bearish as the company will more likely be a long-term beneficiary of AI and profitability is on the rise.

Profit and Long-term storage demand

For this matter, its non-GAAP operating profit margin surged to a record 30% in Q3, up from the 27% achieved in the previous quarter. Looking for a trend, GAAP operating margins have also surged as shown in the chart below.

Thus, the objective seems prioritizing margins, with NetApp’s CFO affirming the strategy has been to grow revenue at a faster rate than operating expenses. This has ultimately improved earnings per share, which came at $1.94 for Q3, also a record.

Now, performing a comparison with Pure Storage confirms that while these two companies have seen about the same gross margins, NetApp’s operating margins have fared better as shown in the chart below.

Furthermore, while revenue is expected to decline on a YoY basis for the fiscal period ending in April 2024, analysts estimate EPS to grow by 15.72%.

I believe that this can be achieved due to the company benefiting from the storage mix in data centers shifting from hard drives to higher-priced flash. As a result, the company expects a higher product gross margin, up from the mid-50s to the upper-50s. However, achieving this target will also depend on factors like commodity prices, quarterly product mix variation, and the pricing environment. In this case, while not deteriorating, macroeconomic conditions remain tight with both inflation and interest rates remaining high.

In this respect, two key drivers for success are how the company adapts its product portfolio to emerging requirements like AI and target markets. First, it is AI-ready and as for the target market, NetApp is focused on both hyperscaler marketplace and cloud storage services.

Valuation and Volatility Risks

Therefore, the company deserves better, and since its trailing price-to-earnings multiple of 17.47x is trading at a discount of 21% relative to the IT sector. Thus, adjusting its share price of $108.15 accordingly, I obtained a target of $131.

This target depends on the company continuing to prioritize margins, which means also spending the same relative amounts on product development (R&D) and sales capacity. However, things may change in case the priority changes to driving more product revenue, and, this is at the expense of profits in response to the competition.

For this purpose, it is important to understand that competition not only emanates from other storage suppliers as to make data available for Gen AI’s algorithm, there is also the network approach depending on use cases. In this case, two technologies are contending for a leading position in AI backend network, InfiniBand and Ethernet. First, InfiniBand which is a proprietary standard and comes bundled with Nvidia processes remains better suited for data-intensive applications but Ethernet is fast catching up and could emerge as the preferred connectivity mode for enterprises.

Therefore, we are still at an early stage when it comes to the way AI is going to play in the data center and the speed at which NetApp’s sales benefit will benefit depends on how AI algorithms are used (trained and used for inference purposes. Here, the risk is that the market goes ahead of itself when expectations are overblown and investors lose money. There are also volatility risks related to interest rates in case the Federal Reserve does not cut interest rates and its RSI of 63.5 indicates that it is in overbought territory. Therefore, risk-averse investors may wait for the company to quantify its AI pipeline or raise guidance before investing.

Now, for those ready to stomach short-term volatility, the stock makes for a valid long-term investment. In this case, the advantage of NetApp compared to others is its huge installed base of appliances and the unstructured data they contain, which puts it in a strong position to benefit from companies wanting to feed these into developing AI and ML applications. Also, by AI- enabling its ONTAP management software for all organizations, it creates opportunities to benefit from storage tailwinds, especially for enterprises that cannot afford the costs of aggregating data using InfiniBand or Ethernet and opt for a more measured approach to developing intelligent applications.

Finally, with cash and equivalents of $2.92 billion versus debt of $2.66 billion, the balance sheet remains strong. Moreover, with an FCF margin of 18.5% which exceeds the IT sector by 83%, the business model is strong at generating cash.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post NetApp: A Long-Term Beneficiary Of AI appeared first on Up2info.com.

• I believe NetApp’s better-than-expected results and outlook signal a positive trend in billings, revenue, and all-flash array revenue that’ll extend into FY25.
• The company’s position in the data management and AI market, as well as its expanded flash portfolio, make it well-positioned for top-line growth.
• I think NetApp will be one of the longer-term benefactors of the AI boom, and is undervalued at current levels.
• I hereon share my thoughts on NetApp and why I think it’ll outperform expectations over the coming quarter.

Investment Thesis

NetApp (NASDAQ:NTAP) reported the third quarter of 2024 results and outlook last month, with the stock trading higher by +12% in extended trading; I believe NetApp is a name that should be on investors’ radar for 2024. At its core, NetApp is an intelligent data infrastructure company that combines its offerings of unified data storage, integrated data services, and CloudOps solutions to create a silo-free infrastructure and enable superior data management. NetApp rode the dot com bubble back in the 1990s and is now in the midst of getting in on the AI boom, in my opinion.

The company reported earnings last month with net revenues of $1.61 billion, ahead of the year-ago quarter’s net revenue of $1.53 billion, accounting for a 5% year-over-year increase and higher sequentially than the $1.56 billion achieved in the second quarter of 2024. NetApp’s results for FY24 thus far reflect a sequential upward trend in billings, revenue, and its all-flash array annualized revenue run rate, mainly driven by the company’s expanded all-flash portfolio, in my opinion. I’m initiating NetApp as a buy because I see this upward trend extending into the next quarter and 1HFY25. NetApp’s results and outlook lead me to believe that the NAND Flash rebound and AI tailwinds will be able to support top-line growth for the company and provide more room for upside to current consensus numbers.

NetApp’s Value Proposition

Data has never been more valuable than it is today, and by extension, storing and managing it in the simplest and most efficient way has never been more of a priority; this is where NetApp’s all-flash portfolio comes into play. NetApp shifted gears since the dot com bubble to provide data-centric solutions in the cloud landscape to hyper scalers, including Amazon (AMZN), Google (GOOG) (GOOGL), and Microsoft (MSFT), among others. In my opinion, its position in the industry and expanded flash portfolio emphasized in this quarter’s earnings call make it among the best-positioned storage names to experience top-line growth supported by AI momentum.

The proof is in management’s outlook for Q4: management is guiding for Q4 revenue in the range of $1.585 billion to $1.735 billion, compared to Street estimates of $1.65 billion in revenue. To top it off, management also raised its full-year 2024 guidance to the range of $6.185 to $6.335 billion. Management’s raised FY24 guidance tells me two things: 1. We’re still in the early phases of generative AI adoption, driving customer needs to scale their foundational data models, and 2. This new and urgent need will reflect positively on the flash business and by extension on NetApp. NetApp has already been recognized for the fifth consecutive year as a leader in the 2023 Gartner Magic Quadrant for Primary Storage and ranked the number one in hybrid cloud IT operations. I believe this will reflect positively on management’s FY25 guidance that is to be announced next quarter. The image below shows NetApp’s earning results for FY24 this far and sets the tone for Q4 results and FY25 outlook.

NetApp is already getting traction for its position at the crossover between data management and AI. On the quarter’s earnings call, CEO George Kurian communicated NetApp’s strong position in AI through customer wins this quarter, including “large NVIDIA SuperPOD and BasePOD deployments.” Kurian noted, “several eight-figure deals in Q3, one of the world’s largest oil and gas companies build their AI supercomputer…, one of the world’s largest genomics company relying on our [NetApp’s] technology to speed up genomic analysis with NVIDIA and NetApp, one of the world’s largest media companies is using us to drive some of the early phases of their Generative AI work.” I highlight this because we’re at a moment in time when everyone wants to get on the AI wagon, regardless of whether they have real AI growth, and this is reflected in how often TMT companies mention AI tailwinds on their earnings calls. The difference with companies like NetApp is that I see the AI tailwinds reflected in deals and customer traction.

Equally important, I see NetApp use its strength data management capabilities to “do things like model versioning, security for your mission-critical data, and be able to deploy and connect data pipelines from production back into training.” Hence, NetApp’s Q3 results should not be seen as a one-time home run or a window to count profits and exit the stock, but rather as a signal of a longer upward trend supported by AI and the NAND flash rebound.

Adapting Through Industry Transitions

Another reason I seek to put NetApp on the radar for longer-term investors is that I believe NetApp’s position in the storage market and its evolution alongside the industry inspires confidence in the company’s ability to ride the upward trend in demand for intelligent data infrastructure triggered by the AI boom. In the 1990s, most of NetApp’s revenue came from the sale of “network filers and cache appliances,” with the company known as one of the original network-attached storage or NAS filers. NetApp adapted to the quickly changing environment with the dot com bubble and began selling storage products to internet-based companies and surged during the dot com bubble up until 2002, of course. Since NetApp has rebounded, shifting gears to focus on the transition to hybrid cloud, hybrid multiclouds, and now intelligence.

While the company gets a bit of backlash for being late to the NAND flash moment, I focus on the company’s forward-looking risk-reward profile, which I believe, at current levels, is attractive. I believe NetApp’s silo-free infrastructure provides the adaptive operations, flexibility, and security requirements to achieve high product traction in the current AI-driven market. The image below from the company’s earnings presentation for its third quarter results outlines NetApp’s innovative position in data infrastructure across the past two decades.

Attractive Valuation

Based on a relative methodology of valuing stocks within my coverage, NetApp provides an attractive investment opportunity for its position in data management and the AI market. NetApp stock trades at a ratio of 16.3 for CY2024, which is relatively lower than its peer group average ratio of 27.1, according to data from Refinitiv shown in the table below. A similar relative valuation is shared by NetApp’s EV/Sales ratio for CY2024, which currently stands at a ratio of 3.3, again lower than the peer group average. I still see a favorable risk-reward profile for the stock due to its AI exposure in 2024 and argue that NetApp is largely undervalued for the position it holds in the market today.

What Could Go Wrong?

While NetApp provides an attractive risk-reward profile, risks remain present. NetApp operates in the data storage hardware and management software business. What this means is that the company sells storage equipment to enterprises and service providers to “store and to share large amounts of digital data across physical and hybrid cloud environments.” The company derives the majority of its revenue, around 90%, from its Hybrid Cloud Segment at $1,455 million this quarter and the remaining from its Public Cloud Segment, which achieved $151M in net revenues for the quarter.

The biggest concern for the company at the moment is lackluster growth in its Public Cloud segment, which achieved a 1% year-over-year growth this quarter. I’m not too concerned about the slower rate of growth there because NetApp made it clear to investors on the earnings call that the company “anticipate[s] approximately $20 million in ARR headwinds from unrenewed subscriptions. This will create minimal revenue impact and should be largely offset by growth in first-party and marketplace services.” Another factor easing my concern is that the company is entering Q4 and FY25 in a stronger position than in FY24, during which NetApp and the broader storage market faced issues from NAND pricing pressure and weak end demand. I see more room for customer appetite for high-performance file storage solutions to train AI/ML workloads amid the AI boom to offset other near-term headwinds.

Still, I warn investors to be cautious when exploring entry points into the stock. I believe a lot of the positive sentiment surrounding the NAND Flash rebound and AI tailwinds have already been priced into the stock after management’s earnings call. The stock is up roughly 36% over the past six months, outperforming the S&P 500, which was up only 14% during the same period, as shown in the graph below. Investors should explore entry points within the high $80 range, in my opinion.

The stock price has only slightly outperformed the S&P 500 over the past three months. NTAP stock is up 15% over the past three months, while the S&P 500 is up 12% during the same period, as demonstrated in the graph below. I think NetApp has more upside to current consensus numbers due to its position within the enterprise data management and storage solution market, showing a solid sequential rebound in share gains due to its all-flash solutions alongside AI momentum and better NAND Flash demand and pricing dynamics. I think NetApp is uniquely positioned to ride this upward trend in NAND Flash recovery, as the company’s 3Q24 quarter reflects strong momentum.

What’s Next?

In my opinion, NetApp should be on investors’ watchlist for 2024. The company provides mature and developed data management capabilities. It is in bed with strategic partnerships that’ll allow it to leverage its capabilities into top-line growth amid the AI boom moment. I expect NetApp to make up for its lack of growth in the past through its expanded all-flash portfolio, and I already see proof of this in the company’s deal wins this quarter and raised guidance for FY24.

I understand investors’ concern that the stock price performance will be vulnerable to market sentiment regarding AI tailwinds. Still, I argue that NetApp will be a longer-term benefactor of the AI boom in FY25. I see more upside to current consensus numbers and expect the stock to trade higher towards 2H24, as enterprises and service providers visibly increase their AI-related capex investments this year in relation to last year.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post NetApp: AI Could Support More Upside – Initiating With A Buy appeared first on Up2info.com.