How Changes In NetApp’s Storage Systems Market Share Impact Its Stock Price
Storage giant NetApp (NASDAQ:NTAP) is one of the largest players in the storage industry, with an estimated 13% share in the global external storage systems market. It competes with large IT hardware vendors Dell-EMC, IBM (NYSE:IBM), HPE (NYSE:HPE) and Hitachi on one end of the spectrum and newer flash-storage startups on the other end. It has been a difficult few years for many large players as they battle through price declines and a low demand environment. Meanwhile, low-cost original design manufacturers (ODMs) and flash-storage startups have further impacted established players by catering to the addressable market with white label storage boxes, which has led customers to transition away from leading IT hardware vendors. This has resulted in a loss of share for large players in the storage market, as evidenced by IDC reported data.
To counter this trend, NetApp’s management has focused on what it calls its Strategic Products, which primarily include Clustered ONTAP, E-Series storage products and SolidFire all-flash storage arrays. Comparatively, the company’s Mature product line largely refers to its older 7-Mode ONTAP storage arrays. The customer response to the company’s strategic products has been impressive through the last year, with NetApp reporting more than 20% revenue growth in strategic product sales through the first three quarters of 2017. As a result, NetApp’s market share in the storage systems market was up by almost 3 percentage points through 2017, per Trefis estimates.
Needless to say, NetApp’s ability to maintain or grow its share in the market is important for its valuation. We have created an interactive model that details how a change in its storage systems market share can impact the company’s value. You can modify assumptions such as global market size or projected market share to see how the EPS or estimated valuation changes. The image below shows one of the key steps in identifying NetApp’s stock sensitivity to change in its market share. We detail how change in share impacts revenue, which then impacts EPS and subsequently the valuation (assuming the P/E multiple doesn’t change).
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We currently forecast NetApp’s share to increase by around 1% in 2018 to 14.2%. However, given the strength in strategic products and robust demand for NetApp’s product line, that growth could continue through 2018. We find that a further 1.2% increase in NetApp’s market share would imply a nearly 4.3% upside to its near-term valuation, which we estimate using projected EPS and a forward P/E multiple. Our sensitivity analysis assumes that the increase in market share would not impact NetApp’s forward P/E multiple, which currently stands at 10.5 based on Trefis estimates (P/E based on Non-GAAP EPS). However, if you disagree with that assumption, you can make changes to all input variables on the interactive dashboards platform to gauge the impact of all changes on our price estimate and EPS.
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