Product Demand Slump To Take NetApp Stock Below $70?

NTAP: NetApp logo

NetApp stock (NASDAQ: NTAP) is up around 25% so far this year, but at the current price near $81 per share, we believe that NetApp stock has around 15% potential downside.

Why is that? Our belief stems from the fact that NetApp stock is up almost 2.25x from its low in March 2020, and after posting mixed full-year 2021 numbers, it’s clear that demand for the company’s products hasn’t yet recovered. Our dashboard What Factors Drove 35% Change In NetApp Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

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NetApp stock’s rise since late-2018 came despite a 6% drop in revenues from $6.15 billion in FY2019 to $5.74 billion in FY2021 (NetApp’s fiscal year ends in April). Net margins dropped from 19% to 12.7% over this period, and combined with a 13% drop in the outstanding share count, EPS dropped almost 30% from $4.60 to $3.29 over this period.

Meanwhile, the company’s P/E (price-to-earnings) ratio rose from 13x to 19x till the end of 2020 and has since risen to over 24x currently. However, given NetApp’s mixed full-year 2021 results, there is possible downside risk for NetApp’s multiple.

So what’s the likely trigger and timing to this downside?

The global spread of coronavirus and the resulting lockdowns have led to a shift from physical memory to cloud storage, due to the increased convenience. This should benefit NetApp, a hybrid cloud data services and data management company, but that has not been the case. NetApp’s full-year 2021 revenues came in at $5.7 billion, up from $5.4 billion, but lower than the $6.1 billion in FY 2019. While hardware and software support revenues have risen over this period, product revenues have dropped from $3.8 billion in FY 2019 to $3 billion in FY 2021. While operating income rose in FY 2021, a rise in the effective tax rate meant that EPS dropped from $3.56 in FY 2020 to $3.29 in FY 2021.

We expect revenue growth to stay weak in the medium term (affected by dropping product demand), and this could weigh on profitability even further. We believe this will drive down the company’s P/E multiple, and could see NetApp stock drop 15% from current levels, to under $70.


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