New AI And Cloud Solutions Will Strengthen Future Market Position

Key Takeaways

• Enhanced sales execution and product innovation in all-flash and cloud solutions are expected to drive significant revenue growth and capture market share.
  
• Strategic cost control, divestitures, and partnerships are aimed at improving operating margins and increasing free cash flow, benefiting overall earnings.
  
• Inconsistent sales execution, divestitures, strong U.S. dollar, and market caution could negatively affect NetApp's revenue growth, profitability, and cash flow.

Catalysts

Provides a range of enterprise software, systems, and services that customers use to transform their data infrastructures in the United States, Canada, Latin America, Europe, the Middle East, Africa, and the Asia Pacific.

• NetApp is focused on enhancing sales execution with improved pipeline scrutiny and tighter controls on deal closures, which is expected to boost revenue and profitability by preventing deal slippages.
  
• Strong growth in the all-flash array business, particularly C-Series capacity flash arrays and ASA scale-out all-flash block storage systems, alongside StorageGrid object storage systems are expected to drive revenue growth, as flash technology continues to replace traditional storage solutions within client infrastructures.
  
• The introduction of new high-performance and mid-range product lines, along with innovations in AI and cloud solutions, particularly for AI-enabled workloads and data lake modernizations, is aimed at capturing a larger market share, which can significantly impact future revenue and margins.
  
• NetApp's Public Cloud strategy, focusing on first-party and marketplace cloud storage services, is driving significant growth, with revenue from these services increasing over 40% year-over-year, which is expected to contribute positively to overall revenue growth.
  
• The company's ongoing actions to control operating expenses and remain disciplined on pricing, alongside the divestiture of non-core business (Spot by NetApp) and strategic partnerships with hyperscalers, are expected to enhance operating margins and free cash flow generation, positively affecting earnings.

NetApp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NetApp's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.5% today to 18.3% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $6.76) by about March 2028, up from $1.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.9x on those 2028 earnings, up from 16.8x today. This future PE is greater than the current PE for the US Tech industry at 15.7x.
• Analysts expect the number of shares outstanding to decline by 1.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.83%, as per the Simply Wall St company report.

NetApp Future Earnings Per Share Growth

Risks

• Inconsistent execution and deal slippage at the end of Q3 could indicate ongoing sales execution challenges, which might impact revenue growth moving forward.
  
• The recent divestiture of the Spot by NetApp business and associated revenue reduction can affect overall revenue figures, particularly in the cloud segment.
  
• Foreign exchange rates, specifically a stronger U.S. dollar, have negatively impacted revenue and EPS, potentially affecting net margins if the trend continues.
  
• General caution in the European markets and components of the U.S. public sector could lead to soft demand and delayed decision-making, affecting overall revenue.
  
• Inventory management challenges with high SSD purchase levels leading to lower cash flow conversion rates might impact future free cash flow and profitability.

Valuation

• The analysts have a consensus price target of $123.875 for NetApp based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $153.0, and the most bearish reporting a price target of just $110.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.5 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $93.77, the analyst price target of $123.88 is 24.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.