2023-07-26 07:39:33 ET
Morgan Stanley upgraded NetApp ( NASDAQ: NTAP ) to Equal-weight from Underweight and raised the price to $74 from $60.
Morgan Stanley analysts noted that with estimates largely derisked, NetApp's valuation is already pricing in a recovery. They would need to see proof of meaningful cloud reacceleration to get more positive on the stock.
The analysts said that NetApp's stock has already built in where they are in cycle, as estimates are unlikely to be revised down at this point.
The company's shares have run ~19% since FQ4 results in May, and has risen 30+% YTD (versus Nasdaq +35% YTD), a move steered by belief that since estimates have bottomed, there is a catalyst path ahead with cloud spend recovery and potential AI revenue, the firm noted.
The analysts added that Hardware is an early cycle beneficiary, making movement fit with where we they in cycle, however, they see more attractive valuations elsewhere in coverage on an EPS growth basis given scale of the cloud business.
The firm sees NTAP being flat to soft into earnings in August due to recent run, mainly given more muted checks.
The analysts don't think that meaningful cloud business reacceleration happens until late CY23 or early CY24, and it is the catalyst for further multiple expansion which could make them more positive.
Another driver of the stock recently has been general AI enthusiasm, with the notion that AI within the enterprise will need more "warm storage", which will boost the adoption of flash and cloud storage, something generally beneficial to storage vendors, according to the analysts.
The firm added that storage is one of the later beneficiaries to AI, making the run in the name ahead of the opportunity. In addition, as the earliest of AI investments may be in public cloud, this is not something the analysts think is a near term driver for NetApp.
The analysts said public cloud spend has been going through a digestion period that was expected to last into late 2023/ early 2024. This has been a headwind to the public cloud services (PCS) business over the last year, one expected to subside going into H2.
However, ~40% of the business is still the CloudOps business, which has been seeing reorganizations to better integrate solutions. The business has not yet recovered to the extent the analysts would require to see to give a larger premium to the PCS business and thus they were moving to Equal-weight, the analysts noted.
NTAP +2.19% to $80.79 premarket July 26
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NetApp stock pops after Morgan Stanley upgrades to Equal-weight