Does The Recent Pullback Make NetApp (NTAP) Look Attractive On Valuation Grounds?

• If you are wondering whether NetApp's share price really reflects what the business is worth today, you are not alone. That is exactly what this article will unpack.
• NetApp shares last closed at US$98.66, with returns of 9.5% over 1 year, 71.3% over 3 years and 58.3% over 5 years. However, the stock has seen a 2.4% decline over 7 days, 6.8% over 30 days and 7.3% year to date.
• Recent company specific headlines have continued to keep investor attention on NetApp, helping frame how the market is reacting to its outlook and balance sheet position. This article will use that backdrop as context, rather than focusing on any single announcement, so you can focus on what the current share price might imply.
• Our yardstick shows NetApp scoring 5 out of 6 on our valuation checks, which suggests it screens as undervalued on most of the measures we use. Next we will walk through those methods one by one while also pointing to an even richer way to think about valuation at the end of the article.

Find out why NetApp's 9.5% return over the last year is lagging behind its peers.

Approach 1: NetApp Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow model takes estimates of a company’s future cash flows and discounts them back to today to arrive at an estimate of what the entire business could be worth right now.

For NetApp, the model used is a 2 Stage Free Cash Flow to Equity approach. The latest twelve month free cash flow stands at about $1.62b. Analysts provide explicit free cash flow estimates out to 2028, with Simply Wall St extrapolating further to build a 10 year path. On this basis, projected free cash flow for 2035 is $2.54b, with each year in between explicitly listed and discounted back to today in the model.

Aggregating these discounted cash flows gives an estimated intrinsic value of US$178.17 per share. Against the recent share price of US$98.66, the DCF output implies a 44.6% discount, which indicates that NetApp screens as undervalued under this specific set of assumptions.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests NetApp is undervalued by 44.6%. Track this in your watchlist or portfolio, or discover 48 more high quality undervalued stocks.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for NetApp.

Approach 2: NetApp Price vs Earnings

For a profitable company like NetApp, the P/E ratio is a useful shorthand for what the market is paying for each dollar of current earnings. It lets you compare how the market prices NetApp against other profitable businesses using the same yardstick.

What counts as a “normal” or “fair” P/E depends on how quickly earnings are expected to change and how risky those earnings are. Higher expected growth and lower perceived risk often support a higher P/E, while lower growth expectations or higher risk can justify a lower one.

NetApp currently trades at a P/E of 16.1x. That sits below the Tech industry average of about 22.3x and also below the broader peer group average of about 44.9x. Simply Wall St’s Fair Ratio for NetApp is 24.9x, which is its own estimate of an appropriate P/E given factors such as earnings growth profile, profit margins, industry, market cap and company specific risks.

The Fair Ratio can be more informative than a simple industry or peer comparison because it adjusts for those company specific traits rather than assuming that all Tech stocks should trade on the same multiple. With NetApp’s P/E of 16.1x below the Fair Ratio of 24.9x, the shares screen as undervalued on this metric.

Result: UNDERVALUED

P/E ratios tell one story, but what if the real opportunity lies elsewhere? Start investing in legacies, not executives. Discover our 18 top founder-led companies.

Upgrade Your Decision Making: Choose your NetApp Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives. These are simply your own story about NetApp that connects what you believe about its business drivers to a financial forecast and a fair value. Narratives are available within an easy tool on Simply Wall St’s Community page that compares that fair value to the current price, updates automatically when fresh news or earnings arrive, and lets different investors express different views. For example, one Narrative might see NetApp’s flash and public cloud mix supporting a fair value closer to the higher analyst target of US$130, while another might focus on memory cost and margin risks and land nearer the US$100 lower target.

Do you think there's more to the story for NetApp? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com