NetApp makes money by selling storage hardware and software primarily to small and medium sized businesses. Companies are increasingly adopting cloud storage. Cloud Storage is a term for a system of flexible storage services allowing businesses to avoid spending money on storage hardware, by using outsourced storage resources owned by a cloud provider (e.g. Amazon).
Small and medium business customers are more likely to adopt cloud storage due to their limited IT resources. In addition, cloud providers will need to purchase more hardware to satisfy their end-customer demands. As a result, NetApp’s storage customer base may shift from small and medium businesses, to cloud providers, over time.
If NetApp is able to sell higher-end storage devices to cloud providers, this trend could have positive consequences for NetApp’s pricing and gross margins. However, if cloud providers continue to primarily purchase the simpler storage devices (e.g. NAS type) that NetApp is known for, the pricing and margin consequences may be negative. NetApp will also face stiff competition from EMC, its primary competitor, which is better known for selling high-end storage devices.
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Within NetApp’s content on our platform, you can see how NetApp’s stock would be impacted if Storage Hardware Gross Margins increased or decreased due to the growing adoption of cloud storage.