Is NetApp Fairly Valued?
NetApp (NASDAQ: NTAP) has seen mixed results in recent years. After a weak 2016, the company saw its revenue stabilize in 2017. While the growth in Product segment was fueled by a 15% increase in unit volume of ONTAP systems, efficient pricing strategy drove the growth in the Software maintenance segment. However, the growth was offset by a weak performance from the Hardware maintenance segment as the average selling price on contracts declined. Overall, revenue for the company declined a modest 0.5% to $5.5 billion. Meanwhile, the company’s EPS improved from $0.77 in 2016 to $1.81 in 2017 because of cost reduction efforts and lower operating expenses.
The company reported strong third-quarter results, as both its revenue and earnings per share beat market expectations. Since the earnings release, the stock price has been on an upward trend and is currently hovering in the high 60s. But, is this price sustainable? Our valuation dashboard suggests that the current market price may be a bit cheap. Below we discuss how we estimate NetApp’s valuation. Detailed steps to arrive at our price estimate and the revenue calculations are outlined in our interactive dashboard, and you can modify our assumptions to arrive at your own price estimate for the company.
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We have a price estimate of $71 for NetApp, which is ahead of the current market price. This is based on a revenue forecast of $5.9 billion. The company’s strategic solutions business has been strong in recent years, and we expect this trend to continue in the future. The transition to flash storage arrays, especially, has proved to be beneficial for the company, as this part of the business has grown about 50% year-on-year. With solutions such as Data Fabric and ONTAP Data Management Software, NetApp is gaining tractions among its customers. Moreover, the company is likely expanding at the expense of big companies such as Dell and Hewlett Packard. per IDC, the market share for these companies has declined while NetApp’s share is demonstrating an upward trend.
Furthermore, we expect high margin flash products and cost optimization measures to boost margins. We forecast net income of about $945 million, or adjusted EPS of about $3.44.
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