Up 28% Since The Beginning Of 2023, What’s Next For NetApp Stock?

NetApp (NASDAQ:NTAP) a company that provides on-premises data storage systems and public cloud services, is poised to report its Q2 FY’24 results toward the end of November. We expect the company’s revenues for the quarter to come in at about $1.54 billion, slightly ahead of estimates, although this would mark a decline of about 7% versus last year.  We estimate that earnings will come in at about $1.40 per share, marginally ahead of the consensus estimates. See our analysis of NetApp Earnings Preview for a closer look at what to expect when the company publishes earnings.

NetApp’s bread-and-butter Hybrid Cloud business has been witnessing some headwinds of late due to weaker information technology spending and cost optimization by large businesses. Over Q1 FY’24, NetApp’s revenue declined by 10% year-over-year to $1.43 billion, compared to $1.59 billion in Q1 2023, with adjusted earnings also declining marginally. While NetApp’s Hybrid Cloud segment saw revenue drop 12%, the company’s public cloud business has been gaining traction, with revenues rising by about 17% over the last quarter. Although the business remains small, with sales at about $154 million, or about 10% of total revenue, the segment remains important to the company given the industry’s push toward cloud-based storage.

Amid the current financial backdrop, NTAP stock has witnessed gains of 15% from levels of $65 in early January 2021 to around $75 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. However, the increase in NTAP stock has been far from consistent. Returns for the stock were 39% in 2021, -35% in 2022, and 28% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 15% in 2023 (YTD) – indicating that NTAP underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could NTAP face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

We think that NetApp has some upside from current levels. The company has taken steps to cut costs and boost profitability in the face of weakening demand, with plans to reduce its headcount. NetApp is also strong in the traditional storage space, particularly in areas such as all-flash arrays (AFA), and this could help the company as technologies such as artificial intelligence (AI) continue to expand. AI large language models require quick access and availability, making AFAs a preferred storage solution. We also believe that NetApp’s valuation is attractive, with the stock trading at about 12x consensus FY’24 earnings. We remain positive on NTAP stock with a $85 price estimate, which is about 10% 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.

[1] Month-to-date and year-to-date as of 11/13/2023
[2] Cumulative total returns since the end of 2016

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