NetApp (NASDAQ:NTAP) is involved in designing solutions for storing, managing and protecting business data through enterprise storage and data management software as well as hardware products and services. It announced its Q1 fiscal 2013 earnings on August 15. Net revenue for the first quarter was $1.44 billion, down 15% q-o-q and 1% y-o-y. Product revenue took a hit as it declined 23% quarterly and 7% annually to $898 million. Service revenue, however, showed robust y-o-y growth, growing 11% and came in at $328 million. A majority of the service revenue was from hardware maintenance and support contracts. NetApp also estimates Q2 revenues in the range of $1.5-$1.6 billion and EPS of around $0.45 – $0.5. 
The stock is trading well below its 2012 highs of $45 and is currently in the $30 range mainly due to lowered guidance owing to slowing IT expenditures in Europe. We believe it is undervalued at its current levels and is worth $40. We explain our analysis and valuation below.
Cash Net Of Debt Is Nearly 40% Of Its Current Market Price
According to its 10-Q filing, cash net of debt is $4.2 billion which translates to about $12 per share, making NetApp’s current stock price more than 40% cash, and we believe the rest of the business is being undervalued for the below reasons.
1) NetApp Is One Of The Top Players In A Growing Storage Market
According to Gartner, the worldwide storage market grew 8% in the first quarter of 2012 from $5 billion to $5.4 billion, with EMC, NetApp and Dell outperforming. While EMC is still the leader by far, owning nearly a third of the market, NetApp is still the second largest player in the market with storage revenue of $691.5 million, up 9.8% since last year. This gives NetApp a 12.7% share of the overall market, up from its 12.5% last year.
Companies are moving away from traditional computing environments to cloud computing, and this shift is likely to drive demand for storage. Big data analytics require higher end storage with flash arrays, and this will drive margins in the near term. As more companies demand cloud computing capabilities, we expect strong demand for NetApp’s storage products. Growth in high-end storage purchases have slowed down due to anticipated new releases but is expected to pick up in the coming quarters.
StorageGRID Can be a Game Changer
In its latest version of StorageGRID software, NetApp has added a key feature called Cloud Data Management Interface (CDMI). CDMI is a standard developed by the Storage Networking Industry Association (SNIA) and addresses the way applications interact with cloud storage such as creation, retrieval and deletion of data elements from the cloud. This is an open standard for self-provisioning and accessing cloud storage. Storage vendors often provide proprietary interfaces and protocols and CDMI is a more open approach aimed at reducing vendor dependability. In essence, a client can shift vendors easily and is not dependent on a single vendor.
Currently, NetApp is one of the few large storage vendors that supports the standard, and we expect this to drive its revenues as it will be able to better manage clients’ storage needs. 
NetApp Enters Lucrative Desktop Virtualization Business
NetApp has now teamed up with desktop-as-a-service (DaaS) provider Desktone to simplify DaaS solution. The plan is to reduce costs, improve performance and manage complexity by integrating know-how and solutions from both companies. DaaS is specifically built for cloud delivery environments and combines technologies from both NetApp and Desktone. It offers a single, scalable infrastructure that is cost-efficient and is equipped with security measures. These are enterprise-ready desktops and the service can scale on-demand, is cost-effective and allows enterprise IT to easily meet end-user business objectives.
NetApp will provide storage and thin client infrastructure along with software support for back-up and deduplication of data. The service will enable instant provisioning of new virtual desktop environments. The new combined entity offering has features such as multi-tenancy, which enables service providers to deliver desktops to multiple customers. FlexClone technology enables quick and almost instant provisioning of new desktops for users with minimum additional computing requirements.
With IT spending on the decline and PC growth declining, this can prove to be a huge growth opportunity for NetApp as companies look to reduce IT hardware costs.
We currently have a $41 Trefis price estimate for NetApp, which is about 30% higher than its market price.Notes: