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Bear of the Day: NetApp (NTAP)

Kevin Cook

NetApp (NTAP) is an $11 billion provider of a full range of hybrid cloud data services that simplify management of applications and data across cloud and on-premises environments.

 

On August 2nd NetApp provided something investors did not like: soft preliminary results for Q1 FY 2020 as well weaker guidance for the year.

 

In the conference call, management noted that broader weakness in macroeconomic environment compelled the company’s enterprise customers to trim capital expenditure. This negatively impacted NetApp’s storage business.

 

Markedly, adoption of hybrid multi-cloud offerings, Cloud Data Services and Private Cloud increased year over year in the first quarter, but couldn’t mitigate the decline in storage business.

 

For Q1, NetApp anticipates revenues in the range of $1.22 billion to $1.23 billion, indicating a year-over-year decline of approximately 17%. Earlier, management had anticipated net revenues for first quarter to be in the range of $1.315-$1.465 billion. The preliminary results reflect decline of approximately 11.9% from the mid-point.

 

Following the bleak preliminary first-quarter results and trimmed outlook for fiscal 2020, NetApp shares were down 20%.

 

Here's what I told my TAZR Trader members that night, as we own a few software analytics players like Alteryx (AYX) that thrive in the cloud/big-data ecosystems...

 

Gunfight at the Big-Data Corral

Posted on 8/2/19

 

My title theme tonight concerns the big earnings blow-ups in Arista Networks (ANET), down 10% on heavy volume, and Network Appliance (NTAP) down 20% on massive volume. 

 

These are both hardware-focused companies providing cloud infrastructure and services.

 

So what happened to Arista (ANET) that could read-through to the cloud/data-center/analytics space?

 

William Blair analysts summed up the ANET bomb by framing Arista’s Q2 EPS beat as buoyed by the announcement that the specific "cloud titan" that hit the pause button on spending in the second quarter (which they believe to be Microsoft) will be resuming ordering in the second half of 2019.

 

While this resumption suggests that the pullback in cloud spending was a blip, not a trend, and Arista is abound in positive developments (e.g., continued strength in the enterprise vertical, momentum in new logo adds, excitement around the pending entry into the Campus market, sustained non-GAAP operating margins in the mid to high-30% range), management continues to strike a more conservative tone around cloud titan spending.

 

Exactly my point of why the cloud/data-center build-out could be as cyclical as Semis.

 

And this is why I focus on the software/big-data analytics plays now, like Alteryx (AYX).

 

So what happened to NetApp (NTAP) that took their shares down 20% out of nowhere?

 

KeyBanc analysts had one of the best notes here...

 

Major Reset on Demand Outlook

 

NetApp issued preliminary F1Q20 guidance that was materially below consensus, missing revenue by $165M and outlining a major retreat in storage demand, especially in the U.S. On the call, NetApp suggested that the installed base is still working through capacity adds from CY18, as well as internal sales executions issues.

 

The KeyBanc team, shaking their heads, are now projecting product growth at -13% y/y in FY20 and +4% in FY21.

 

This outlook from a $15 billion player in hybrid cloud data services that serve APM (application performance management) across cloud and on-premises environments is NOT GOOD for many also-ran data-focused players.

 

Thankfully, AYX is one of the emerging top-dog players, even though most companies and investors don't know their name or their expertise yet.

 

All that mystery bodes well for us.

 

(end of Aug 2 TAZR commentary excerpt)

 

NTAP became a Zacks #5 Rank (Strong Sell) a few days later, as estimates plummeted. For the full-year FY 2020 (Q1 ended July), EPS projections dropped over 20% from $4.97 to $3.92. And next year's EPS was also taken down 20% from $5.61 to $4.44.  

 

On Aug 14, NTAP delivered official results for the quarter with $0.65 vs the new consensus of $0.57 (which fell from $0.83).

 

Also last night, cloud monster Cisco (CSCO) delivered mixed results and guidance with mentions of macro growth concerns and trouble bidding on contracts in China. Go figure.

 

So by the time you are reading this on Thursday morning, the Tech sector could be under even more pressure.

 

Bottom line for NTAP: Great company but until these estimates stop going down and start heading back up, stay away from the shares. The Zacks Rank will let you know.

 

Disclosure: I own AYX shares for the Zacks TAZR Trader portfolio.

 

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