NetApp Stock Looks Attractive Despite Easing IT Spending

NetApp Inc. (NASDAQ:NTAP) a company, which provides on-premises data storage systems and public cloud services, has seen some headwinds of late amid weaker IT spending and cloud cost optimization by large businesses. Over Q3 FY’23, NetApp’s revenue declined by 5.4% to $1.53 billion, with adjusted earnings also falling by a similar magnitude. Although public cloud revenues rose by about 36% over the quarter, the hybrid cloud business saw revenues decline by about 9%. Things are expected to remain tough, with the company projecting sales of $1.475 billion to $1.625 billion for Q4, implying a decline of roughly 10% year-over-year at the mid-point. While NetApp stock has gained about 10% year-to-date, despite the headwinds, on account of cooling inflation and investor rotation back to tech stocks, it has meaningfully underperformed the Nasdaq-100, which has gained about 20% year-to-date.

So is NetApp stock still worth a look despite the current headwinds? We believe it is. The company has taken steps to cut costs and boost profitability in the face of weakening demand, indicating that it would lay off about 8% of its workforce. Moreover, while the company’s growth is almost being entirely driven by the public cloud business, where competition from big tech giants such as Microsoft, Google, and Amazon is intense, we think NetApp could hold its own. Many customers are opting for hybrid cloud environments instead of fully public environments, given the greater control that it offers. NetApp is also strong in the traditional storage space, particularly in areas such as all-flash arrays, and this could help the company as technologies such as artificial intelligence (AI) continue to expand. We also believe that NetApp’s valuation is attractive, with the stock trading at about 12x consensus FY’23 earnings. We remain positive on NTAP stock with a $74 price estimate, which is about 12% ahead of the current market price. See our analysis on NetApp Valuation: Is NTAP Stock Expensive Or Cheap? for more details on what’s driving our price estimate for NetApp.

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