Here’s How NetApp Could Still Bounce Back

NTAP: NetApp logo

NetApp (NASDAQ:NTAP) stock lost nearly 45% this year, declining from $63 to $35. However, it then increased by about 20%, from $35 to $42 (as of June 25, 2020). This means that it is still more than 30% below where it was at the beginning of 2020. Why is the stock down significantly? NetApp makes money selling data management hardware, software, and solutions. This means that its clients are spread across numerous sectors such as energy, financial services, government, health care, life sciences, and manufacturing. Many of these sectors have suffered a sharp drop in demand which would mean postponing infrastructure and software upgrades. But wait – there is more to this story. Trefis price for NetApp is $51, roughly 18% above the market price of $43 (as of June 26, 2020), based on this potential trigger. 

Economy Re-Opening Could Give NetApp Stock A Boost

We forecast the company’s fiscal 2021 sales (ending Apr 2021) at $5.3 billion as against $5.4 billion in fiscal 2020 (ending Apr 2020). This is very minor decline compared to many other industries. For instance, companies operating in hospitality, leisure, retail, and airlines industries may be looking at 20%-30% drops in their revenue for the full year. NetApp should benefit as  the economy starts opening up as companies are likely to start spending on upgradation of their IT infrastructure – an expense that many of them are holding during the lockdown. Why? Besides the usual upgradation cycles, we expect a shift in business models to digital – requiring increased data storage and processing.

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So What Does This Mean For Share Price?

The combination of the above will imply fiscal 2021 EPS of $3.82 per share. How much should the market pay for each dollar of NetApp’s earnings? As a reference, to earn close to $3.82 per year from a bank, you’d have to deposit about $350 in a savings account today, so about 90x the desired earnings. But NetApp is a much riskier business compared to depositing your money in a savings account. First of all, competition needs to be considered. Second, NetApp’s revenue growth is impacted by business cycles as IT infrastructure upgrades and renewals can slow down when the economy is not doing well. The current situation is a case in point. This means that you will want more dollars in return for the money you invest in NetApp. We apply a P/E multiple of 13.2 for NetApp, which is close to the average for the last two fiscal years. It is a blended figure arrived at by looking at historical P/E figures as well as implied forward P/E figure based on current market price. We note that NetApp’s P/E has been coming down over the last few years. While NetApp is one of the stocks to watch out for, Altria has even higher upside potential

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