An Expanding Cloud Lifts NetApp

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As the world grew more digital, so did NetApp (NTAP). You might remember NetApp as Network Appliance, one of the darlings of the tech boom of the late 1990's.

Today’s version of the company still focuses on storage and data management. But while NetApp started out as a hardware play, software drives the bus in today’s economy. NetApp lives in the cloud these days, generating pretty much all of its revenue from cloud-based products and services.

The cloud is a computing environment that runs on servers accessed via the internet. Users can tap into storage and computing power, never interacting directly with the core hardware. Behemoths such as Amazon (AMZN) and Microsoft (MSFT) have staked huge claims in the cloud space, but there’s still plenty of room for other players.

NetApp generates more than 99% of its revenue in the hybrid cloud, a digital infrastructure that involves both private and public networks. Quince Market Insights projects the $50 billion hybrid cloud market will expand at an annualized rate of 18% for the next seven years, growth that boosts our confidence in NetApp’s future.

Not that NetApp’s present looks bad. In the July quarter, the first quarter of NetApp’s fiscal 2022 ending April, the company grew sales 12% to $1.46 billion, topping the consensus by 2%. Per-share profits rose 58% to $1.15, a positive surprise of 21%.

Billings jumped 20% to nearly $1.4 billion. Since providing encouraging guidance in August, NetApp’s sales consensus rose at least 2% for this year and each of the next two years, while Wall Street’s profit target rose at least 7% for the same periods.

Analysts now project sales growth of 9% and profit growth of 23% this year, with growth slowing to 5% for sales and 9% to 11% for profits in each of the next two years. Given the upward trend in analyst estimates and NetApp’s history of exceeding expectations, we see the company as a good bet for outperformance.

Investors need not overpay for NetApp’s growth potential. At 20 times trailing earnings, NetApp trades 12% below its five-year average valuation. The stock looks expensive relative to the tech-hardware group, but we could make a solid argument that NetApp belongs in the far pricier software group. Currently, NetApp trades 48% below the software group’s median P/E. The stock has been added to our "Focus List" of recommendations.

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