NetApp Positions Itself for Pickup in Enterprise Spending

NetApp (NASDAQ:NTAP) creates innovative storage and data management solutions for small and medium-sized companies around the world. It competes mainly with EMC (NYSE:EMC), IBM (NYSE:IBM), HP (NYSE: HPQ) and Dell (NASDAQ:DELL) in the external disk storage systems market.

NetApp’s storage hardware helps customers manage data more efficiently and keep the information available and secure. NetApp’s storage software enables customers to use all features and functions related to data storage. Features enabled by NetApp’s software include back-up and recovery, replication and retention.

Below we review the potential impact of upcoming IT trends on our $64.48 Trefis price estimate for NetApp’s stock, about 12% above the market price.

Rise in IT Outsourcing

NetApp’s CEO Tom Georgens discussed the outlook for 2011 and was optimistic about NetApp’s business while being cautiously optimistic on the broader corporate spending outlook. We believe NetApp is a company that is well positioned to benefit if enterprise spending picks up. NetApp recently completed the biggest quarter and a half of hiring indicating that NetApp is preparing for big trends coming up. ^[1]

Rising Demand for Storage Virtualization from Increasing Adoption of Cloud

The cloud creates some interesting opportunities as many corporations are thinking of or in the middle of redesign their IT architecture. CIO’s are considering whether they want to spend heavily to upgrade and maintain proprietary expensive IT networks which need more storage and expanded capabilities — or can they outsource some of this to the cloud?

The main fear now centers on the cloud’s reliability and performance.  We admit the migration to the cloud won’t happen over night. But as more firms adopt cloud-based services and service providers establish credibility, we expect to see that this migration to pick up in 2011. At some point this migration will accelerate as this technology is widely embraced and this could occur in the near future.

We have earlier discussed how NetApp’s stands to benefit from increasing demand from cloud. (See How NetApp Benefits from Cloud Demand)

Mobile Computing

Other area of focus for NetApp in 2011 will be mobile technology where its presence so far has been minimal. Successfully integrating mobile technology into the broader IT infrastructure is now a priority for most firms. Given expanded network access and the proliferation of intelligent devices, mobile computing will have a large impact on business and thus IT requirements going forward . ^[2]

NetApp realizes this potential (as it once did for virtualization – long before its competitors) and appears willing to spend resources on this vision.

Enterprise IT Spending to Increase

As 2010 closes, IT budgets are finalized for 2011. The prolonged economic slowdown has caused a slowdown on the IT refresh cycle. In a lot of cases IT infrastructure is getting old and companies are looking at what to do next. Gartner predicts a 3% rise in IT spending reaching $2.5 trillion in 2011 and a survey by Forrester Research suggests that CIOs will spend more. ^{[3] [4]}

We estimate there could be an upside of 6% to our $64.48 Trefis price estimate for NetApp’s stock if global demand for storage increases by 50% in 2011, more than our current forecast of 40%. On the other hand, a slower increase in demand for storage (30%) in 2011 would result in a 7% decline to our estimate of NetApp’s stock.

Our complete analysis of NetApp’s stock is here.

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1. ‘Opportunities for Innovators’ in IT Buying Cycle, Invsetors.com, Dec 30, 2010 [↩]
2. ref:2 [↩]
3. Gartner Says Worldwide Enterprise IT Spending to Reach $2.5 Trillion in 2011, Gartner [↩]
4. Enterprise IT Spending 2010, CIO Insight [↩]