2023-09-26 10:13:58 ET
Summary
- NetApp stock presents a mixed investment profile with positive attributes like an attractive dividend and a substantial cash reserve, offset by concerns about its growth rates and the competitive tech sector.
- NetApp's near-term prospects are influenced by a challenging macroeconomic environment, with revenue growth rates expected to stabilize and possibly grow in the second half of fiscal year 2024.
- The stock's valuation appears reasonable, with an attractive dividend yield, substantial net cash, and a commitment to returning 100% of free cash flow to shareholders.
Investment Thesis
NetApp ( NTAP ) is a mixed investment. There are several noteworthy positive aspects, including its attractive dividend. The other aspect that I believe should be given substantial consideration is its massive pile of cash pile on the balance sheet .
Yes, the business' growth rates leave a lot to be desired. And yes, as I noted in my previous analysis , tech stocks are either thriving or dying, and I don't believe this business is thriving, at least not at the moment. But I also believe it's important to change one's mind if the situation warrants it.
Accordingly, I have to say that I'm positively drawn towards NetApp. Even if I don't quite feel comfortable recommending this stock, I have to say, if the business continues on its mission to return capital to shareholders, and its valuation becomes attractive enough, I will have to reconsider my stance on this stock.
NetApp's Near-Term Prospects
NetApp is an IT storage provider. NetApp provides software to manage, protect, and optimize data cloud resources.
NetApp is a data-centric software company. NetApp empowers its customers to manage applications and data across hybrid multi-cloud environments. Their portfolio of cloud services and storage infrastructure, driven by intelligent data management software, enhances application performance and reliability while reducing customers' costs.
NetApp focuses on addressing the challenges posed by rapid data and cloud growth, across a multi-cloud environment, for the adoption of advanced technologies like AI, Kubernetes, and modern databases.
Their approach, termed "evolved cloud," streamlines hybrid multi-cloud operations, offering operational simplicity and flexibility.
Further, NetApp also provides cloud services and storage solutions for public cloud platforms, including Amazon AWS ( AMZN ), Microsoft Azure ( MSFT ), and Google Cloud Platform ( GOOG ), enabling customers to optimize storage in the cloud efficiently.
With this context in mind, let's discuss its outlook.
Revenue Growth Rates Reflect a Challenging Macro Environment
The graphic above is a reminder that NetApp's outlook for fiscal Q2 2024 points to negative mid-single-digit revenue growth rates. Despite all the clamor for the need for more data storage, it appears that NetApp isn't one of the companies that's benefitting from this secular trend.
That being said, note what management stated on the earnings call :
The challenging macro environment continued to pressure IT spending. However, as George pointed out, we are well aligned to customers' priority investments and remain confident our go-to-market changes and product innovations will drive growth in the second-half of fiscal year ‘24.
As you can see from the quote, NetApp believes that the second half of fiscal 2024, starting November 2023, should see NetApp's revenue growth rates stabilize and possibly even deliver some top line growth.
Needless to say, if this ultimately transpires to be the case, this would be very welcome news for shareholders here.
To sum up its prospects, I believe it's fair to say that NetApp's near-term prospects are mixed given the challenging macroeconomic environment.
Their strategic focus on managing controllable elements, improving their storage business performance, and refining their approach to the Public Cloud business has delivered some positive early indicators.
For instance, NetApp introduced innovative storage solutions, such as the AFF C-series and ASA A-series, and emphasized their strength in predictive AI and machine learning workloads.
While the demand environment remains cautious, the company's efforts to capture growth in the hybrid cloud and public cloud markets, along with their commitment to enhancing profitability while executing on their strategic initiatives, position them well for solid profitability. A topic that we now turn to.
NetApp Stock Valuation -- A Lot of Cash
EPS this year points at 5.85x, putting the stock priced at 13x this year's non-GAAP EPS figures, which on the surface doesn't look expensive.
The other aspect we have to be aware of is what I noted in the introduction, which is that NetApp carries about $600 million of net cash. Think about this in terms of its market cap, this equates to more than 3% of its market cap being made up of cash.
On top of that, we must keep in mind that NetApp is a dividend-paying stock. And not just a namesake dividend, but in actuality, quite an attractive yield reaching close to 2.7%. And more! NetApp is determined to return 100% of its free cash flow to shareholders.
Accordingly, I believe that NetApp could during this fiscal year end up close to 6% of its market cap via share repurchases and dividends.
The Bottom Line
I find NetApp, Inc. to be an intriguing investment with both positive and cautious aspects. On one hand, the company offers an appealing dividend, strong share repurchases, and boasts a substantial cash reserve.
However, it faces challenges in terms of growth rates, particularly in a tech sector where companies are either thriving or faltering. Despite some reservations, I'm drawn toward NetApp, and while I may not be fully comfortable recommending the stock at this moment, I'm open to reconsidering my stance if the company continues returning capital to shareholders.
NetApp's near-term prospects indicate mixed results in a challenging economic climate, but its strategic initiatives, focus on improving profitability, and innovative products position it well for potential success, especially in the hybrid and public cloud markets. Additionally, its stock valuation appears reasonable, supported by a sizable cash reserve and a generous dividend yield.
For further details see:
NetApp's Mixed Investment Profile, With Attractive Dividend And Buybacks