Data storage firm NetApp (NTAP) is set to report fiscal fourth quarter and full year 2021 results on June 2. The current consensus estimate calls for a decline in earnings of 5.9% compared to Q4 of 2020. The current revenue estimate points to a small increase of 7%. The earnings and revenue growth have been an issue for NetApp over the last few years, but most other areas of fundamental analysis are pretty strong.

When I first started researching NetApp ahead of the earnings report, the first thing that jumped out at me came from the chart. Looking at the weekly chart, we see that the stock has been on a huge run over the last 15 months or so. However, it could be facing some resistance from an old high from back in September ’18. That high marked the beginning of what would become a downwardly sloped trend channel that saw the stock fall almost 60% from the high to the low. The upper rail connected the highs from 2018, 2019, and early 2020.

NetApp eventually broke out of the channel in November and it continued to rise rather quickly, but now it’s facing the possible resistance from the old high. The $80.53 level reached in 2018 isn’t an all-time high, but to find the all-time high you have to go back to 2000. NetApp peaked at $126.03 in October 2000 and within one year the stock would lose over 96% of its value. The stock dropped to a low of $4.95. I should mention that the prices reflected on the chart from Stockcharts.com are adjusted for dividends and splits.

In addition to the potential resistance at the old high, I’m a little concerned about the high readings on the overbought/oversold indicators. The 10-week RSI is just below the 70 threshold that indicates oversold conditions. The stochastic indicators are above 90 and firmly in overbought territory.

All the points made about the technical analysis thus far have been about the weekly chart and indicators. If we look at the Tickeron Technical Analysis Screener, we see that several daily indicators have generated bullish signals in the last week.

We see bullish signals from the AROON, MACD, and Momentum indicators all within the last seven days.

Profitability Measurements and Value are Much Better than the Growth Measurements

I mentioned earlier that earnings were expected to decline slightly while revenue is expected to grow modestly. That is primarily what we have seen from the company over the last few years—modest growth or even declines in earnings and revenue. For the last three years earnings have grown at a rate of 4% per year while revenue has declined by 3% per year. In the third quarter, earnings declined by 5% compared to the previous year while revenue increased by 5%.

Despite these trends, not all of the fundamental indicators are poor or below average. The return on equity is great at 141.7%. The profit margin is above average at 20.9%.

In addition to the profitability measurements being better than most, the valuation ratings are better than average. The trailing P/E is 29.65 and that is below the tech sector average. The forward P/E is at 17.27 and that is considerably lower than the sector average. NetApp gets an 8 on its Valuation Rating from Tickeron with 1 being the best score a company can get with the worst being a 100. The company also scores well in its P/E Growth Rating and its Price Growth Rating.

Sentiment toward NetApp is Extremely Bearish

As I was going through the different analysis styles and gathering information about NetApp, the biggest surprise came from the sentiment indicators. Both analysts and short sellers are far more bearish toward the stock than they are the average stock. This could benefit the stock in the long run and after the earnings report.

There are 25 analysts covering the stock with 11 “buy” ratings, 12 “hold” ratings, and two “sell” ratings. This puts the buy percentage (the number of buy ratings as a percentage of the total ratings) at 44%. The average buy percentage falls in a range from 65% to 75%.

The short interest ratio is currently at 8.47 and that is almost triple the average ratio which falls in the 3.0 range. The ratio has vacillated pretty wildly over the last five months. It was down below 4.5 back in mid December and again in February and March. It was above 7.0 in mid February and now it’s above 8.0. The short interest itself has been trending lower, but the average daily trading volume is the part of the ratio causing the big swings.

The overall picture for NetApp is mixed in my opinion. Earnings and revenue haven’t been growing as much as I would like, and unfortunately they aren’t expected to improve much in the next few years. The profitability measurements and the valuation metrics are good, but are they good enough to help push the stock higher?

The stock has made a great move from the March ’20 low, but now it’s facing resistance at the high from 2018 and the stock is overbought based on the weekly stochastic indicators.

One factor that could help the stock push through the resistance is the sentiment. When we see bearish sentiment indicators like we see on NetApp, it generally indicates that the expectations are low heading in to the earnings announcement. When expectations are low, it becomes easier for a company to impress enough to attract buyers.

I would consider NetApp a hold right now as I want to see one of two things happen. I want to see the stock pull back a little and move out of overbought territory, or I want to see it break out above the resistance. Either way, I would wait until after the earnings report to establish a new position.