Upside to NetApp as SME’s Increase IT Spend

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 efficiently and keep their information both 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.

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. In 2010 nearly 19% of total IT dollars were spent on hardware and infrastructure capabilities, with storage representing a large portion of this. ^[1] Gartner predicts a further 3% rise in IT spending reaching $2.5 trillion in 2011. ^[2]

Below we review the potential impact of upcoming IT trends on our $64.48 price estimate for NetApp’s stock.

NetApp a Visionary in Backup/Recovery Space

In a recent report by research firm Gartner, which categorizes enterprise disk-based backup/recovery providers based on their strategic vision and ability to execute, NetApp was placed in the “visionaries” quadrant. NetApp’s Vice President, Chris Cummings, believes that the firm’s positioning in this quadrant is an indication of NetApp’s longstanding history of innovation in backup and recovery solutions, and reflects the efficiency, performance, and cost savings that the firm provides to its customers. ^[3]

Given NetApp’s strong positioning in the data storage space and the fact that it is among the pioneers of virtualization storage solutions, the fastest growing segment in the data storage industry, we believe NetApp stands to benefit significantly as IT spending increases in 2011.

See our full analysis and $64.48 price estimate for NetApp

Potential Upside to NetApp

We currently forecast NetApp’s share in the storage market will increase going forward from 11.5% in 2010 to about 13% by the end of our forecast period. However, a 2% increase in NetApp’s storage market share by the end our forecast period would imply 13% upside to our $64.48 price estimate for NetApp’s stock, which already stands ahead of market price.

Below we list a few key factors that could help NetApp increase its share in the storage market:

1. NetApp’s unified storage strategy has been very successful in the market and has enabled it to gain a leadership share in this segment.

A unified storage system supports NAS, Fiber Channel SAN and iSCSI SAN in a single system. Advantages of NetApp’s products are:

• Easier Deployment – several applications can be provisioned on a single array.
• Simplified Management – customers can manage all of their storage resources from a single console.
• Reduced Total Cost of Ownership – customers do not need two separate storage networks for their block-level and file-level data, lowering their initial capital expenditures. In addition, operating expenses are lower as less support staff is required.

2. NetApp’s key customers are small and medium enterprises (SMEs) which comprise a fast growing segment within storage.

The unified storage market is primarily driven by SMEs as the performance requirements of SMEs are less stringent than those of large enterprises. Thus as IT spending increases, NetApp has significant upside potential as it is well-positioned to capture the bulk of the demand coming from the SMEs.

1. Enterprise IT Spending 2010, CIO Insight [↩]
2. Gartner Says Worldwide Enterprise IT Spending to Reach $2.5 Trillion in 2011, Gartner [↩]
3. Leading Analyst Firm Positions NetApp as a Visionary, Yahoo Finance [↩]