Transition To Flash-Based Storage Will Aid NetApp’s Near Term Earnings Growth
NetApp (NASDAQ: NTAP) has performed very well in recent years, with steady top line and bottom line growth. In the most recent quarter, the company’s revenues grew in low single-digits, despite a weakened demand environment in the recent past. This can be attributed to transition to flash storage arrays. Looking forward, we forecast the company’s adjusted earnings to grow in high twenties percent in fiscal 2019. Despite the industry-wide normalization of NAND pricing, we expect that NetApp’s hybrid product approach and strong execution will drive growth for the company. Below, we discuss the factors that could contribute to the company’s earnings growth. We have created an interactive dashboard analysis ~ How Much Can NetApp’s Earnings Grow In Fiscal 2019? You can adjust various drivers to see the impact on the company’s adjusted earnings. Here is more Information Technology sector data.
Expect Revenues To Grow In Mid-Single-Digits
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NetApp’s product revenues, which includes hardware equipment that helps customers manage data more efficiently and keep the information available and secure, have seen steady growth in the recent past, and we expect this trend to continue in the near term. This can be attributed to the transition from disk to flash-based storage for several businesses. The company’s sale of add-on software and infrastructure solutions products are further aiding the revenue growth. Several cloud enterprises are looking to upgrade their data centers to fulfill the requirements of modern-day business applications that require higher speed and responsiveness. The next generation storage market is expected to grow at a CAGR of 34% until 2023. Consequently, NetApp’s total addressable market (TAM) will also grow and aid the revenue growth. NetApp’s software maintenance business is also seeing steady growth. It primarily refers to product upgrades, enhancements, and technical support for customers. The software maintenance business will also benefit from the growth in the product segment. Services, which includes hardware maintenance, professional services, and training, is a recurring revenue stream, and it can be linked to the company’s installed base. The company’s gross margins of 82% for hardware and software maintenance are much higher than that for the product segment at around 53%. A growth in the company’s installed base will aid the services business as well. Overall, NetApp is poised to see steady growth in the near term, given the shift to flash-based storage, and higher sales of its all-flash FAS, EF, and SolidFire products. The company has been able to expand its margins despite the weakening demand in the recent past. Note that foreign tariffs imposed on China in particular have resulted in slower economic growth, and weakening consumer demand. NetApp’s margin expansion can be attributed to controlled expenses and higher ASPs (average selling prices) for its products. We expect slight growth in the gross margins for the full fiscal, and the adjusted earnings to be $4.50 per share, reflecting roughly a 30% y-o-y growth. Our price estimate of $74 for NetApp is based off a 16x price to earnings multiple.
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