Is NetApp Stock Oversold At $40?

by Trefis Team
+18.07%
Upside
42.80
Market
50.53
Trefis
NTAP
NetApp
Rate   |   votes   |   Share

After almost a 35% decline in NetApp’s (NASDAQ: NTAP) stock since the beginning of this year, we believe that NetApp’s stock is likely oversold at the current price of $40 per share and it has a significant upside. The key is NetApp’s stock is still 30% lower than it was at the beginning of 2019 and over 23% lower than it was at the starting of 2018, a little over two years ago. Our dashboard, ‘What Factors Drove -23.7% Change In NetApp Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Some of the stock price gain over the last two years is justified by the roughly 11.9% growth seen in NetApp’s revenues from 2017 to 2019. This combined with a 2x jump in net income margin from 8.8% in 2017 to 19% in 2019 and a reduction in share count due to stock repurchases worth $2.9 billion helped earnings per share basis swell 163%. Notably, NetApp has about $3 billion in cash as of the last report, and the company will very likely continue to buy back shares as it still has around $2 billion remaining under its share repurchase program.

However, a sizable drop in NetApp’s P/E multiple has partially mitigated the rise in the company’s earnings. NetApp’s P/E multiple dropped from 30x at the end of 2017 to 13.4x by the end of 2019. Moreover, NetApp’s P/E is down to about 9x now, given the volatility of the current situation. This reflects a 71% decrease in P/E multiple from December 2017 to March 2020. We believe there is a potential upside for NetApp’s multiple when compared to levels seen over recent years – P/E of 13x at the end of 2019, and 30x as recent as in late 2017.

How Is Coronavirus Impacting NetApp’s Stock?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely impact NetApp’s revenues as major companies are likely to delay expenses related to upgrading infrastructure and software. Between January 31st and March 31st, Netapp stock has lost 25% of its value (vs. about 22% decline in the S&P 500). A bulk of the decline came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia. Notably, the company derives a bulk of its revenues from the US, which has become the new epicenter of the outbreak, with the country recording the largest numbers of COVID-19 cases across the globe.

We believe NetApp’s fiscal Q4 results in April will confirm the trend in revenues. It is also likely to accompany lower FY’21 guidance. However, if there are signs of abatement of the crisis by the time Q4 results are announced, the company’s stock could see a modest uptick. Going by historical trends, we believe that the company’s stock is currently oversold and offers potential upside returns.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

 

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams

Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!