To The Moon

$NetApp(NTAP)$

NetApp recently released its quarterly results, and as a major player in the storage industry, it's drawing attention. While the stock is indeed moving, it's not in the direction investors hoped for. Despite this, NetApp remains one of the 50 most significant companies in the technology sector.

Wall Street’s focus tends to be on whether a company beats or misses earnings expectations, and unfortunately, NetApp missed this time, which likely contributed to the stock’s drop. However, when we dig deeper into the company’s performance, there are more significant underlying challenges, particularly related to growth. In an era where IT budgets and AI spending are booming, NetApp’s role in this landscape—specifically in storage—becomes a key question.

Earning Overview

NetApp (NTAP) reported its fourth-quarter and fiscal year 2024 earnings on May 30, 2024. The company achieved a record operating margin of 27% for the fiscal year. In Q4, revenue grew by 6% year-over-year to $1.67 billion, driven by a 17% increase in all-flash array revenue. Non-GAAP earnings per share (EPS) for the quarter were $1.80, marking a 17% year-over-year rise. For the full fiscal year, revenues totaled $6.27 billion, a 1% decrease from the previous year, while non-GAAP EPS increased to $6.46 from $5.59.

The reported revenue of $1.64 billion fell short of the Zacks Consensus Estimate of $1.69 billion, resulting in a -3.09% revenue surprise. The company met the EPS estimate of $1.91, so there was no EPS surprise this quarter.

NetApp operates with two primary business models: its hybrid cloud and public cloud sectors. The hybrid cloud business is more traditional, focusing on managing storage devices rather than simply selling disk drives, serving the needs of hyperscalers and other large clients. In comparison, the public cloud sector remains much smaller but still crucial to the company's future.

On the revenue front, NetApp reported $1.64 billion for the quarter, marking a modest 2% year-over-year increase. Of this, the hybrid cloud business generated $1.47 billion. While the public cloud sector contributed a fraction of that, it is an area worth paying attention to. NetApp’s billings were slightly better than revenue at $1.7 billion, but again, the growth here was limited to just 2%.

While investors tend to focus on the year-over-year revenue and earnings changes and compare them to Wall Street’s projections, key metrics often provide better insight into a company’s underlying performance.

Since these metrics play a pivotal role in driving both top-line and bottom-line results, comparing them to year-ago figures and analyst estimates offers investors a clearer picture of potential stock performance.

Looking ahead, NetApp projected fiscal year 2025 revenues between $6.45 billion and $6.65 billion, indicating an approximate 4.5% growth. The company also anticipated gross margins ranging from 71% to 72% and operating margins between 27% and 28%.

Fundamental Analysis

NetApp’s hybrid cloud business, which is a unified data storage portfolio combining flash, disk, cloud, hardware, software, and support, represents 11% of their revenue and had been one of the company's fastest-growing sectors. However, in this quarter, it grew at just 1%, while the larger public cloud business saw 15% growth. This shift indicates that NetApp’s focus on hybrid cloud may not be progressing as expected, despite its potential for faster growth compared to its larger public cloud business.

The company maintained a 22% operating margin, which remains solid. However, despite the growth in public cloud, NetApp’s total revenue growth fell short of expectations, leading to a 14% drop in the stock price after hours. This follows a 36% increase in the previous year, mostly in the first half, while the stock has been flat to declining since July.

Profitability

Non-GAAP EPS: For Q4 FY2024, NetApp posted a non-GAAP EPS of $1.80, which was a 17% year-over-year increase. Full-Year FY2024: Non-GAAP EPS for the year increased to $6.46, up from $5.59 in FY2023, showing improved profitability. Operating Margin: NetApp achieved an operating margin of 27% for FY2024, showcasing efficiency in managing costs while generating strong profits.

Gross Margins

Q4 FY2024: Gross margins were strong, reflecting the profitability of NetApp's cloud and storage solutions. Guidance for FY2025: Gross margins are projected between 71% and 72%, which is consistent with the company's historical performance and reflects the high-value nature of its offerings.

Product and Market Position

All-Flash Array Revenue: NetApp saw a significant 17% growth in its all-flash array business in Q4 FY2024, a key growth driver for the company. This reflects increasing demand for high-performance storage solutions. Cloud Services: The company continues to expand its cloud offerings, particularly in hybrid and multi-cloud solutions, positioning itself well in a growing market.

Guidance

Despite the challenges, George Curry was asked about the state of government sales in Europe, particularly amidst the chaotic situation in Washington, D.C. Here’s what he had to say:

"In Q3 and continuing into Q4, we’ve observed a degree of caution in the European markets, especially in countries like France and Germany, where there are no functioning governments. We’ve also seen a bit more caution in the U.S. public sector. However, in our Q4 guidance, the U.S. public sector performed as expected. January, as always, is the first month of the calendar year for many customers, and sometimes budgets take a little longer to be finalized. That said, we have good visibility into our pipeline and are progressing with deals as planned."

For fiscal year 2025, NetApp (NTAP) provided the following guidance:

• Revenue: Projected to be between $6.45 billion and $6.65 billion, which indicates a growth of approximately 4.5% year-over-year.

• Gross Margin: Expected to be between 71% and 72%.

• Operating Margin: Forecasted to be between 27% and 28%.

This outlook reflects NetApp's positive expectations for continued growth and profitability.

Free Cash Flow

​As of the quarter ending in October 2024, NetApp Inc. (NTAP) reported a Free Cash Flow (FCF) of $936 million, reflecting a 2.8% year-over-year increase from $911 million in the same quarter of the previous year. This positive trend in free cash flow is indicative of NetApp's effective cash management and operational efficiency, providing the company with the financial flexibility to invest in growth opportunities, reduce debt, and return value to shareholders.

NTAP VS Competitor

Market Position: NetApp competes with companies like EMC, Dell Technologies, Hewlett Packard Enterprise (HPE), and Pure Storage. While these competitors are strong, NetApp’s focus on hybrid cloud solutions and its solid market presence in data management and storage have helped it carve out a leading position.

Risks and Challenges

Economic Cycles: As a technology company, NetApp's business is sensitive to economic downturns and customer budget cuts, especially in IT spending.

Competition: The data storage and cloud services market is highly competitive, and NetApp needs to maintain innovation and pricing strategies to protect its market share.

Market Volatility: Like other tech companies, NetApp is susceptible to market fluctuations, including changes in investor sentiment or technology trends.

Valuation

My estimates an intrinsic value of $93.73 per share, suggesting the stock is undervalued by about 5% compared to its current market price. calculates a fair value of $87.75 per share using DCF modeling, indicating the stock is overvalued by approximately 39.78% at its current price

Market sentiment

Revenue Growth and Outlook

Positive Sentiment: Investors are encouraged by NetApp’s growth in the all-flash array market and its cloud services. These areas are showing strong demand, and the company’s guidance for FY2025 reflects growth expectations (4.5% increase in revenue).

Steady Guidance: The projected 4.5% growth in FY2025 revenue shows a moderate but stable outlook, which appeals to investors looking for steady returns in a growing market.

Earnings Performance: The 17% year-over-year increase in non-GAAP EPS for Q4 FY2024 and the company's solid profitability are also viewed positively, reinforcing market optimism about its ability to execute its business plan.

Market sentiment for NetApp is generally positive, with investors optimistic about its growth prospects, especially in cloud services and storage solutions. While there are risks such as competition and macroeconomic factors, the company's solid earnings performance, growth outlook, and dividend payments provide stability and investor confidence. NetApp is viewed as a reliable performer in the cloud and storage market, but market conditions and competitive pressures will continue to shape investor sentiment in the future.

Conclusion

So, what’s the bottom line here? The key takeaway from NetApp's earnings report for Q3 2025 is that while some of their business segments performed adequately, the quarter didn’t reflect strong growth in enterprise spending or AI. Revenue growth slowed to just 2%, which was not what the company had hoped for. Despite generating nearly $1.7 billion in revenue, which was the target Wall Street had set, the stock dropped because the company missed that expectation.

However, perhaps the most telling figure is from their hybrid cloud business, which had once been a faster-growing segment. This quarter, it grew by only 1%, which clearly wasn’t enough to meet NetApp’s goals or market expectations.

NetApp shows a stable and solid financial performance, driven by its core strengths in storage solutions, hybrid cloud services, and a solid product portfolio. Its revenue growth and profitability have been consistent, and its future outlook is positive, particularly with expected growth in its cloud and storage solutions. Like many tech companies, NetApp’s performance can be affected by macroeconomic factors such as economic slowdowns, fluctuations in corporate IT spending, and global geopolitical events.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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