NTAP: Cloud Software Momentum And Margin Recovery Will Drive Measured Upside Ahead

Key Takeaways

• Surging AI and hybrid cloud adoption is boosting demand for NetApp's integrated, subscription-based storage solutions and expanding its high-margin, recurring revenues.
  
• Strengthened hyperscaler partnerships and cloud innovations position NetApp for increased market share, long-term revenue growth, and enhanced profitability.
  
• Ongoing cloud migration, geographic revenue concentration, and intensifying competition threaten NetApp's growth, margins, and ability to maintain premium positioning in a shifting storage market.

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.

• Accelerating adoption of AI and analytics workloads across industries is driving demand for unified, high-performance, and scalable data infrastructure, with NetApp securing over 125 AI wins in Q1 (more than doubling year-over-year); this trend is expected to drive revenue and earnings growth as AI deployments move from proofs-of-concept to large-scale production.
  
• Ongoing enterprise migration to hybrid and multi-cloud environments is creating sustained demand for NetApp's natively integrated first-party and marketplace cloud storage services, which grew 33% year-over-year and are expanding recurring, higher-margin subscription revenues and improving gross margin stability.
  
• NetApp's deepening partnerships and integration with hyperscalers (AWS, Azure, Google Cloud) and advancements in hybrid, cloud, and edge-ready solutions position it to capture incremental share in a rapidly growing addressable market, supporting long-term revenue expansion and market leadership.
  
• Substantial growth in Keystone Storage-as-a-Service (up ~80% year-over-year) and increased deferred revenue (+9% year-over-year) indicate growing preference for subscription-based and as-a-service storage, supporting higher revenue visibility and margin expansion as mix continues to shift toward high-value services.
  
• Expanding portfolio of AI-ready innovations, operating efficiencies, and consistent improvements in Public Cloud gross margins (now guided to 80–85%, up from 75–80%), are expected to further enhance profitability and drive long-term earnings growth.

NetApp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NetApp's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.8% today to 19.0% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $6.98) by about September 2028, up from $1.2 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 19.5x on those 2028 earnings, down from 21.0x today. This future PE is lower than the current PE for the US Tech industry at 24.3x.
• Analysts expect the number of shares outstanding to decline by 2.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.3%, as per the Simply Wall St company report.

NetApp Future Earnings Per Share Growth

Risks

• NetApp's traditional product revenue is declining (down 2% year-over-year in Q1), indicating potential risk from broader industry trends such as the shift away from on-premises storage toward public cloud and commoditization by hyperscalers, which can compress long-term revenue growth.
  
• Large portions of NetApp's growth are currently concentrated in the Americas, with persistent softness in the U.S. public sector and EMEA (Europe, Middle East, Africa); continued geographic concentration and regional weakness could limit sustainable international revenue expansion and earnings predictability.
  
• The migration of enterprise customers and workloads to hyperscalers like AWS and Azure, and NetApp's reliance on partnerships with these cloud providers creates margin compression risk and reduces differentiation, which could weigh on future gross margins and competitive positioning.
  
• Increasing customer adoption of Storage-as-a-Service (Keystone) and subscription-based models, while driving some recurring revenues, may initially pressure near-term cash flows and revenue recognition, and complicate long-term profitability compared to legacy high-margin hardware sales.
  
• Heightened competition-both from established rivals and new open-source or cloud-native storage providers-places ongoing downward pressure on pricing and poses a risk to NetApp's ability to maintain premium pricing, directly impacting future gross margins and net earnings.

Valuation

• The analysts have a consensus price target of $118.286 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 $130.0, and the most bearish reporting a price target of just $100.0.
• 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 19.5x, assuming you use a discount rate of 8.3%.
• Given the current share price of $123.12, the analyst price target of $118.29 is 4.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.