Expanding Flash Arrays And Cloud Services Propel Growth Amid Financial And Market Risks

Key Takeaways

• Expansion in all-flash arrays and growth in customer acquisition in this segment highlight potential for continued revenue increases without specifying figures.
  
• Strategic focus on AI, hybrid cloud storage solutions, and cloud storage services indicates alignment with market demands and potential for future growth and improved net margins.
  
• Reliance on pre-purchased NAND, geopolitical tensions, CFO succession, AI expansion risks, and competitive pressures in storage markets could impact revenue and margins.

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.

• The expansion of NetApp's all-flash array portfolio and the growth in customer acquisition in this segment indicate an opportunity for continued revenue growth, especially considering the noted 21% increase in all-flash array annualized revenue run rate.
  
• The well-received launch of the new AFF A Series family of high-performance all-flash arrays, designed for demanding environments and AI workloads, suggests potential for future product revenue increases.
  
• Significant growth in the Storage-as-a-Service offering, Keystone, with over 60% revenue growth from the previous year, points towards increased recurring revenue and enhances customer stickiness.
  
• NetApp’s focus and innovation in AI and hybrid cloud storage solutions, coupled with strong customer momentum in these areas, indicate both a strategic alignment with market demands and an avenue for substantial future growth in revenue and market share.
  
• The company’s increasing leadership position in cloud storage services, highlighted by roughly 40% year-over-year growth in first-party and marketplace storage services at hyperscaler partners, supports expectations of improved net margins through the scaling of higher-margin cloud services.

Assumptions

• Analysts are assuming NetApp's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.0% today to 18.3% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $6.04) by about September 2027, up from $1.1 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.9x on those 2027 earnings, up from 21.6x today. This future PE is greater than the current PE for the US Tech industry at 20.1x.
• Analysts expect the number of shares outstanding to decline by 1.92% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.49%, as per the Simply Wall St company report.

Risks

• The reliance on pre-purchases of NAND could pose a risk if NAND prices decrease or if there is an unexpected shift in technology preference, which could impact product cost and margins.
  
• The ongoing geopolitical tensions and macroeconomic uncertainties mentioned could lead to reduced IT spending by customers, impacting revenue growth.
  
• Succession risk with the CFO's retirement could lead to transitions within the finance department, potentially affecting financial strategy and execution.
  
• The company's expansion into AI and Gen AI workloads presents execution risk, especially if adoption rates do not meet expectations, potentially affecting future revenue streams.
  
• Competitive pressures in the all-flash array and cloud storage markets, especially from pure-play storage companies and integrated system vendors, could lead to market share challenges, impacting both revenue and margins.

Valuation

• The analysts have a consensus price target of $133.1 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 $155.0, and the most bearish reporting a price target of just $108.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.3 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 23.9x, assuming you use a discount rate of 7.5%.
• Given the current share price of $114.18, the analyst's price target of $133.1 is 14.2% 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.