Despite rising almost 80% from its low in March 2020, at the current price of $62 per share, we believe NetApp stock (NASDAQ: NTAP) has significant upside potential. NetApp stock has increased from $35 to $62 off the recent bottom, a little more than the S&P which increased by around 70% from its lows. Further, the stock is up only 5% from its level at the end of 2018, and we believe that NTAP stock could regain its recent high of $71, rising around 15% from its current level around $62, driven by expectations of strong demand and strong Q3 2021 results despite the pandemic. Our dashboard What Factors Drove 5% Change In NetApp Stock Between 2018 And Now? has the underlying numbers behind our thinking.
The stock price rise since 2018-end came despite a 9% drop in revenue from $5.92 billion in FY 2018 to $5.41 billion in FY 2020. However, this was outweighed by a 14% drop in the outstanding share count, that led to revenue per share (RPS) rising from $22.09 to $23.53 over this period.
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NetApp’s P/S (price-to-sales) multiple dropped from 2.7x in 2018 to 2.57x by 2019 end, but has since risen to 2.66x, riding the rally in technology stocks. We believe that the company’s P/S ratio has the potential to rise further in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.
Where Is The Stock Headed?
The global spread of coronavirus and the resulting lockdowns in early 2020 have seen a surge in online activity, due to a rise in new blogs and websites and has also led to a lot of businesses shifting online. NetApp operates in the cloud data services and data management segment, and thus the pandemic has actually helped NetApp’s business. The company posted Q3 2021 revenue of $1.47 billion, up from $1.4 billion for the same period last year. However, higher operating expenses saw operating income drop from $268 million to $258 million, but we believe that with online activity continuing to surge and the need for cloud storage rising by the day, NetApp will continue to see revenue growth in the near to medium term, causing profitability to rise.
We expect this to drive up the company’s P/S multiple, and believe that NetApp’s stock can rise around 15% from current levels, to regain its recent high of $71.
While NetApp stock does seem attractive, 2020 has created many pricing discontinuities which can offer further trading opportunities. For example, you’ll be surprised how the stock valuation for Activision Blizzard vs. D.R. Horton shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.