NetApp Inc’s NTAP shares have registered a decline of 30.7% in the past three months, steeper than the 28.7% decline of the Computer Storage Devices Industry. Over the same time frame, the Computer and Technology sector and the S&P 500 Composite have lost 15.4% and 10.2%, respectively.
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NetApp’s share price has been affected by guidance revision. Management has lowered its outlook for fiscal 2025, due to divestment of Spot by NetApp, forex headwinds, global Public sector weakness and fiscal third-quarter revenue performance. Apart from that, the recent volatility owing to escalating tariff tensions also affected the share price. Since April 2, the stock has lost nearly 9%.
Given such a scenario, investors are likely to contemplate whether to stay invested or cash out. Let us discuss the pros and cons of NTAP and ascertain the best course of action for your portfolio.
NTAP’s Tailwinds
Strength in flash business, Public Cloud segment and emerging opportunities in cloud/AI bode well for NetApp. NetApp is witnessing higher demand from customers for its portfolio of modern all-flash arrays, especially the C-series capacity flash and ASA block-optimized flash. The new all-flash A-series is also picking up momentum. These enterprise storage products will allow users to boost workloads, including traditional enterprise applications and Gen AI.
The company expects the new AFF A-series, along with its C-series and ASA products, to capture further share in the all-flash market. In the fiscal third quarter, the company’s All-Flash Array Business’ annualized net revenue run rate was $3.8 billion, up 10% year over year. Total billings rose 2% year over year to $1.7 billion. Also, Keystone’s storage-as-a-service offering has been gaining significant traction, with revenues increasing nearly 60% year over year in the fiscal third quarter.
Solid momentum in hyperscaler first-party and marketplace storage services has been driving revenues from the Public Cloud. Public Cloud segment’s revenues improved 15% year over year to $174 million, driven by 40% increases in first-party and marketplace cloud storage services. NetApp’s partnerships with major hyperscalers such as Amazon and Microsoft, through offerings like Amazon FSx for NetApp ONTAP and Microsoft Azure NetApp Files, solidify its position as a critical player in the cloud infrastructure space, which is poised for continued growth as enterprises migrate more workloads to the cloud.
Apart from the demand for flash and block, increasing demand for NetApp’s cloud storage and AI solutions bodes well. In the fiscal third quarter, the company won more than 100 AI and data lake modernization deals. The company is also working on the development of GenAI cloud and on-premises solutions in collaboration with industry behemoths.
NetApp recently partnered with Alphabet to announce new capabilities for Google Cloud NetApp Volumes, a fully managed file storage service built natively into Google Cloud. These new capabilities significantly reduce complexity, boost performance and unlock new potential for cloud storage workloads, notably those driven by artificial intelligence, electronic design automation and large content repositories.
NTAP’s Strong Capital Deployment
For the third quarter of fiscal 2025, the company generated net cash from operations of $385 million and free cash flow of $338 million. Net cash balance provides the required flexibility to pursue any growth strategy, whether through acquisitions or otherwise.
A strong balance sheet helps NetApp to continue its shareholder-friendly initiatives of dividend payouts. NetApp returned $306 million to its shareholders as dividend payouts and share repurchases in the fiscal third quarter. The company has $600 million worth of shares remaining under its existing authorization.
NTAP Lowers Outlook
Management has lowered its outlook for fiscal 2025, due to divestment of Spot by NetApp, forex headwinds, global Public sector weakness and fiscal third-quarter revenue performance. It now expects full-year revenues in the range of $6.49-$6.64 billion, up 5% year over year at the mid-point. Earlier, it anticipated sales in the band of $6.54-$6.74 billion.
Non-GAAP earnings per share for fiscal 2025 are now forecasted to be between $7.17 and $7.27, up 12% year over year at the mid-point. Earlier, it expected non-GAAP earnings between $7.20 and $7.40 per share. For fiscal 2025, NetApp now expects non-GAAP gross margin of 71% compared with the earlier range of 71-72%. Non-GAAP operating margin is anticipated to be in the band of 28-28.5%, unchanged from the prior view. Free cash flow for fiscal 2025 is expected to be slightly lower on a year-over-year basis due to SSD-related cash outflows.
A weak IT spending environment and stiff competition in the flash and cloud markets remain additional headwinds.
Southbound Estimates & Bearish Indicators for NTAP
In the past 60 days, analysts have revised earnings estimates downward for the current quarter and current year.
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Moreover, it is also trading below its 50 and 100-day moving averages, indicating bearish sentiment.
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Conclusion: Hold NTAP for Now
Lowered fiscal 2025 guidance have understandably shaken investor confidence, the long-term fundamentals and strategic positioning of the company remain solid.
Consequently, investors already owning the stock can stay put given strong fundamentals.
NTAP carries a Zacks Rank #3 (Hold) at present.
Stocks to Consider
Some better-ranked stocks from the broader technology space are Quantum Corporation QMCO, Super Micro Computer, Inc. SMCI and Science Applications International Corporation SAIC. QMCO, SMCI and SAIC carry a Zacks Rank #2 (Buy) each at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Quantum is a leading provider of end-to-end data management solutions. The Zacks Consensus Estimate for QMCO’s fiscal 2025 bottom line is pegged at a loss of $4.82, unchanged in the past seven days. Quantum’s shares have surged 34.5% in the past year.
Super Micro Computer is a total IT solution manufacturer for AI/ML, Cloud, HPC, Storage and 5G/Edge technologies. The Zacks Consensus Estimate for SMCI’s fiscal 2025 earnings is pegged at $2.55 per share, unchanged in the past seven days. SMCI’s shares have plunged 62.4% in the past year.
Science Applications is one of the leading IT and professional services providers, primarily to the U.S. government. Science Applications’ earnings beat the Zacks Consensus Estimate in three of the trailing four quarters while missing in one, with the average surprise being 14.62%. Its shares have lost 3.9% in the past year.
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