Summary
- Investors should watch NTAP's management guidance, sell-side estimates and target price changes, and industry survey results before previewing its third quarter earnings.
- My take is that NetApp's actual Q3 FY 2023 bottom line should come in above the sell-side's expectations.
- I maintain a Buy rating for NTAP, in view of a potential positive earnings surprise and its attractive valuations.
Elevator Pitch
My Buy rating for NetApp's ( NTAP ) stock stays unchanged.
I noted that NetApp is an attractive dividend play with my earlier article for NTAP written on June 7, 2022. With the latest write-up, I preview NetApp's upcoming earnings announcement for the third quarter of fiscal 2023 (YE April 30).
I determine that the chances of NTAP achieving a Q3 FY 2023 earnings beat are pretty good. NetApp's current valuations are undemanding based on the forward P/E metric, and NTAP's stock price has room to rise with a potential valuation multiple expansion supported by above-expectations EPS.
Q3 FY 2023 Results Reporting Date For NTAP
NetApp previously issued a media release on February 6, 2023, noting that the company's Q3 FY 2023 earnings will be disclosed on February 22, 2023, after trading hours. NTAP's third quarter results briefing will be held in the early afternoon on the same day as its earnings release.
NetApp's Q2 Earnings Review And Q3 Guidance
As part of the preview of NTAP's Q3 FY 2023 financial results, it is necessary to review NetApp's Q2 FY 2023 financial performance and the company's forward-looking management guidance.
NetApp's Q2 FY 2023 results weren't as good as what they seemed on paper.
The company's non-GAAP adjusted earnings per share or EPS grew by +16% YoY from $1.28 in Q2 FY 2022 to $1.48 for Q2 FY 2023, and NTAP's second quarter bottom line beat the sell-side's consensus normalized EPS estimate of $1.33 by +11%. However, NetApp's Q2 FY 2023 non-GAAP earnings included non-operating other income of approximately $23 million (or $0.11 per share). In other words, NTAP's second quarter normalized EPS, excluding non-operating other income, will be around $1.37 which translates into a more modest +3% earnings beat.
Furthermore, the YoY topline growth for NTAP slowed from +11% for Q2 FY 2022 and +9% for Q1 FY 2023 to +6% in Q2 FY 2023. NetApp's actual second quarter revenue of $1,663 million barely missed the market's consensus topline projection of $1.67 billion.
At the company's Q2 FY 2023 earnings call on November 29, 2022, NetApp specifically highlighted that the weak "IT capital spending environment, including the focus on optimization of cloud spending" has been a key headwind.
As part of its Q2 FY 2023 results disclosure, NTAP also revised its expectations for its full-year FY 2023 performance and issued new Q3 FY 2023 guidance. NetApp reduced the mid-point of its fiscal 2023 topline growth guidance from +7% to +3%, and the company also cut the mid-point of its FY 2023 normalized EPS guidance from $5.50 to $5.40.
The new Q3 FY 2023 management guidance provided by NetApp was below expectations. Based on the mid-point of its financial guidance, NTAP is expected to register revenue of $1.6 billion and a normalized EPS of $1.30 for the third quarter of the current fiscal year. In contrast, the consensus Q3 FY 2023 topline and bottom line for NetApp prior to its Q2 FY 2022 earnings release were much higher at $1.71 billion and $1.44 , respectively.
NTAP's lackluster Q2 FY 2023 financial performance and disappointing Q3 FY 2023 guidance are not necessarily a bad thing, as expectations for NetApp's near-term financial performance are very low as outlined in the next section.
The Market's Expectations Of NTAP's Third Quarter Performance
The sell-side analysts think that NetApp's financial results and stock price performance will be poor in the short term, after assessing NTAP's second-quarter results and third-quarter outlook.
The current Wall Street consensus Q3 FY 2023 revenue and normalized EPS forecasts for NTAP are $1.62 billion and $1.31 , respectively. The analysts' consensus financial projections are largely in line with the company's management guidance and are equivalent to QoQ declines of -3% and -11% for NetApp's topline and bottom line, respectively. It is also noteworthy that 20 of the 23 Wall Street analysts covering NTAP's stock slashed their third quarter EPS estimates for the company in the last three months.
In the past three months, the number of Strong Buy and Buy ratings for NetApp decreased from 13 to 10 , and there was a new Strong Sell rating awarded to NTAP in this same period. Barclays ( BCS ), JPMorgan ( JPM ), and Morgan Stanley ( MS ) were among the sell-side brokers which downgraded their respective investment ratings for NetApp in recent times. NTAP's mean sell-side analyst target price was also lowered by -13% from $88.05 to $76.48, since the company reported Q2 FY 2023 earnings.
My Prediction Is A Q3 Earnings Beat For NetApp
I take the view that NetApp will be able to deliver above-expectations normalized EPS for the third quarter of fiscal 2023 (November 1, 2022 to January 31, 2023 calendar year).
According to a January 23, 2023 research report (not publicly available) issued by JPMorgan with the title "Channel Talk: 1Q23 Dist./VAR Survey", actual IT spending for calendar year Q4 2022 could have been better than what the market expects. As per JPM's report, the "25 distributors and VARs (Value-Added Resellers)" in the IT industry surveyed had recorded Q4 2022 (calendar year) sales that were "tracking on average 1% above plan."
Separately, my interpretation of NetApp's management comments at recent investor events suggests that the company's actual Q3 FY 2023 might potentially meet or exceed market expectations. At the UBS ( UBS ) Global TMT Conference on December 5, 2022, NTAP noted that the company's 2H FY 2023 performance thus far was consistent with "the macro" and "the customer conversations that we're having." NetApp also mentioned at the Barclays Global TMT Conference on December 6, 2022 that "we wanted to be prudent in terms of our second half (2H FY 2023)", even though "we still feel really good about the products."
In a nutshell, the market doesn't have sky-high expectations relating to NTAP's Q3 FY 2023 results, and insights from a recent distributor survey and the company's participation in investor conferences indicate that NetApp could potentially achieve an earnings beat for the third quarter.
Concluding Thoughts
NetApp remains a Buy-rated stock in my opinion. NetApp's consensus forward next twelve months' normalized P/E has already derated significantly from a three-year peak of 18.8 times recorded in September 2021 to 12.5 times as per S&P Capital IQ data. I believe that there is a decent chance of NetApp reporting higher than expected earnings for Q3, and this might be what is needed to re-rate NTAP's valuations and push its share price up.
For further details see:
What Investors Need To Watch With NetApp's Q3 Earnings