Up 45% This Year, Will Higher Flash Array Sales And Gen AI Drive NetApp Stock Higher?

NetApp (NASDAQ:NTAP) a company that provides on-premises data storage systems and public cloud services, has had a solid year so far, rising by close to 45% since early January with its stock trading at about $128 per share.

While NetApp’s bread-and-butter Hybrid Cloud business witnessed some headwinds over the last calendar year, due to weaker information technology spending and cost optimization by large businesses, things appear to be turning around. Over Q3 and Q4 FY’24 (fiscal year ended April 26) the company saw revenue grow year-over-year, after seeing declines over the previous four quarters straight. Hybrid cloud revenues rose to $1.516 billion in the most recent quarter, up about 6% compared to last year. The hybrid cloud – which includes a mix of public clouds, private clouds, and on-premises resources – offers customers greater flexibility and control over their IT systems.

NetApp is also poised to benefit from the demand for artificial intelligence, which should call for more of the company’s hardware and tools for deployment in large-language model environments. Moreover, the company could see higher sales of its flash-based products as opposed to lower-speed hard disk-based products which could cause bottlenecks in AI systems. Additionally, flash-based memory is likely to work better with high-performance GPUs from the likes of Nvidia and AMD. As AI moves from the training phase to the deployment phase, into public cloud infrastructure, NetApp could see demand for its hardware rise further.

NTAP stock has seen extremely strong gains of 100% from levels of $65 in early January 2021 to around $130 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period.In comparison, Arista Networks (NYSE:ANET), a company that benefits from generative AI, has seen its stock surge by over 300% over the same period. Arista is a market leader in high-speed networks catering to hyper-scalers and big corporations that are major stakeholders in the generative AI trend. Turns out, Arista is part of the 30-stock Trefis High Quality (HQ) Portfolio, which 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. Now, can NetApp’s stock continue to outperform going forward?

We believe that NetApp’s valuation is fair, with the stock trading at a little over 18x consensus FY’25 earnings. Our price estimate for NTAP stock stands at about $131, slightly ahead of the market price. There are a couple of trends that could drive NetApp’s earnings. Overall, NetApp expects its total addressable market to expand by more than $100 billion by 2027. The company sees an incremental $40 billion from the all-flash data market, $27 billion in file and block storage, $27 billion from the public cloud, and another $14 billion from artificial intelligence storage space.  NetApp’s margins are also likely to trend higher driven by a higher mix of all-flash array sales, and higher cloud and services.  The company has taken steps to cut costs and boost profitability in the face of weakening demand, indicating laying off about 8% of its workforce in recent months. 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] Returns as of 6/21/2024
[2] Cumulative total returns since the end of 2016

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