NetApp (NTAP) Up 35% in the Past Year: Will the Rally Last?
NetApp NTAP witnessed strong momentum in the past year, with its shares rallying 35.2% compared with the S&P 500 Composite’s 21.6% growth. The Sunnyvale, CA-based company provides cloud services and storage infrastructure powered by intelligent data management software.
The stock is trading 6.2% below its 52-week high of $91.78, reflecting further upside potential.
NTAP’s fiscal 2025 revenues are anticipated to rise 3.7% year over year. The company’s earnings are expected to climb 10% and 3.8% on a year-over-year basis in fiscal 2024 and 2025, respectively.
Over the past 60 days, estimates for fiscal 2024 and fiscal 2025 earnings per share (EPS) have improved 7.3% and 4.2% to $6.15 and $6.38, respectively. The long-term earnings growth rate is 8.6%.
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NTAP’s PE ratio is pegged at 14.03, below the industry’s ratio of 24.9.
Growth Catalysts
NTAP remains well poised to gain from data-driven digital and cloud transformations. Frequent product launches and secular trends in generative AI and high-performance computing bode well. Cost-cutting efforts and new go-to-market measures, along with focused approach to boost storage and cloud business, are added positives.
The company reported second-quarter fiscal 2024 results, wherein both the top and bottom lines surpassed the Zacks Consensus Estimate. Non-GAAP EPS of $1.58 increased 7% year over year. Management projected non-GAAP EPS in the range of $1.35-$1.45.
Though revenues of $1.562 billion decreased 6% (down 8% at constant currency) year over year, it remained within management’s guidance of $1.455-$1.605 billion. Weak IT spending was an overhang.
Extensive cost discipline aided margin performance. Non-GAAP gross margin of 72% expanded 570 basis points (bps) from the prior-year levels. Non-GAAP operating income improved 6.6% year over year to $419 million. Non-GAAP operating margin extended 320 bps to 26.8%.
Raised Outlook
Despite soft macroeconomic conditions, management expects strength in product and hyper-scaler first-party and marketplace services to drive revenues. As a result, NTAP updated its fiscal 2024 revenue guidance.
NetApp now expects revenues to inch down 2% year over year compared with the earlier projection of a decline in the mid-to-low single-digit range on a year-over-year basis.
It now forecasts non-GAAP EPS to be between $6.05 and $6.25 (previous prediction: $5.65 and $5.85).
NTAP expects the non-GAAP gross margin to be nearly 71% compared with 70% expected earlier. Non-GAAP operating margin is envisioned to be nearly 26% compared with the prior prediction of 25%.
Healthy Capital Allocation Strategy
NetApp’s cash, cash equivalents and investments were $2.620 billion. Its long-term debt was $1.991 billion as of Oct 27, 2023. For the fiscal second quarter, the company generated net cash from operations of $135 million and free cash flow of $97 million (free cash flow margin was 6.2%).
A strong balance sheet helps NetApp continue shareholder-friendly dividend payout initiatives. In second-quarter fiscal 2024, it returned $403 million to shareholders as dividend payouts and share repurchases. For fiscal 2023, the company had returned $1.28 billion to shareholders through dividends and share repurchases.
A Few Headwinds
Currently, NetApp’s performance is affected by a muted IT spending environment amid global macroeconomic turbulence. Weakness in public cloud subscription services is likely to remain a headwind in the near term for this Zacks Rank #3 (Hold) stock.
Stocks to Consider
Some better-ranked stocks worth consideration in the broader technology space are Cadence Design Systems CDNS, NETGEAR NTGR and Blackbaud BLKB. While NETGEAR currently sports a Zacks Rank #1 (Strong Buy), Cadence and Blackbaud carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Cadence’s 2023 EPS has remained unchanged in the past 60 days at $5.10. CDNS’ long-term earnings growth rate is 17.9%.
Cadence’s earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 4.1%. Shares of CDNS have gained 60.3% in the past year.
The Zacks Consensus Estimate for 2023 is pegged at a loss of 9 cents per share for NETGEAR, which remained unchanged in the past 30 days. NTGR’s earnings outpaced the Zacks Consensus Estimate in three of the last four quarters while missing once. The average surprise was 127.5%. Shares of NTGR were down 25.2% in the past year.
The Zacks Consensus Estimate for Blackbaud’s 2023 EPS has improved 1.3% in the past 60 days to $3.86.
BLKB’s earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 10.6%. Shares of BLKB have jumped 47.6% in the past year.
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NetApp, Inc. (NTAP) : Free Stock Analysis Report
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