After Strong Run, Do Cloud Stocks Need a Breather?

Last week NetApp (NASDAQ:NTAP) dipped on F5 earnings as revenues came in a little below expectations. While profit for F5 surged by 69% in Q1 year over year beating analyst expectations, the stock fell as investors had become accustomed to cloud players beating and raising expectations. ^[1] In addition to NetApp, other cloud EMC (NYSE:EMC), Salesforce.com (NYSE:CRM) and Riverbed saw profit taking as a result of F5’s earnings.

While we are bullish on storage and cloud networking stocks, we felt it was worth reviewing NetApp’s position in the industry. In an earlier note, we highlighted how cloud computing is resulting in a transition in the data storage space and all major players are making significant investments to grab the cloud opportunity. (See How NetApp Benefits from Cloud Demand, Dell’s Strategic Shift to Cloud Lifts Stock Outlook)

NetApp, a large player in the cloud computing space, competes primarily with EMC, VMware (NYSE:VMW), HP (NYSE:HPQ) &  IBM (NYSE:IBM)  in the data storage market, and we currently have a $64.48 Trefis price estimate for NetApp’s stock, about 15% ahead of the current market price.

F5 a Niche Player in Cloud Space

F5 provides network optimization solutions and is a niche player in the cloud space. The firm is the market leader in application delivery controllers (ADC) which helps network managers control traffic and improve software performance.

With the increasing adoption of cloud computing and virtualization, a large amount of work is shared between virtualized infrastructures. As such optimization has become increasingly important in a cloud environment and firms are making significant investments to acquire or develop optimization solutions. Recently NetApp also acquired Akorri Networks, a storage optimization firm that helps companies use their storage capacity more efficiently in virtualized environments. (See Netapps Targets Virtualization With Akorri Acquisition Adding Upside Potential)

NetApp Need Not Worry

Less than expected growth in F5’s Q1 revenues indicates that analysts’ forecasts for the cloud computing firms might have been a little too aggressive or investors were looking for a reason to take some profit. Below we show our forecast for the growth in the total storage market which is one of the major driver for NetApp.

Total data storage has seen tremendous growth in the past growing at an average rate of more than 50%, and we estimate that total data storage will continue to observe meteoric growth going forward driven by increased personal consumption as internet penetration grows rapidly.

We believe the earnings miss for F5 is a firm specific event and was due to, as the firm says, “certain sales deals not closing in late October”. We remain optimistic for NetApp as cloud as a concept gains increasing popularity and foresee its large scale adoption and believe a few surprises (like F5’s) do not indicate any long term threat to the cloud industry on the whole.

However, a slightly lower growth in total data storage due to slower adoption of cloud and virtualized storage solutions could result in noticeable downside to our $64.48 Trefis price estimate for NetApp’s stock. To show sensitivity, if you drag the trend line in the chart above 10% lower by the end of the forecast period, this results in about a 7% price estimate decline.

Drag the trend line in the chart above to see the impact of various storage market scenarios on NetApp’s stock value.

Our complete analysis of NetApp’s stock is here.

1. F5 Tumbles On Sales Miss, Weak Outlook, Investors.com [↩]