NetApp (NASDAQ:NTAP) stock has significantly underperformed the market in the last years. However, considering its compelling valuation metrics and strong earnings growth prospects, it is now an opportunity to buy a good stock at a cheap price. I see strong revenue and earnings growth prospects for the company, as large enterprises are relying on NetApp to help them bridge the on-premises architectures of today with the requirement to leverage multiple cloud services in the future. NetApp is generating strong cash flows and returns value to its shareholders by stock buybacks and increasing dividend payments. Moreover, NetApp has been able to show earnings per share surprise in each one of the last four quarters.
NetApp is engaged in design, manufacture, and marketing of networked storage solutions. The company provides storage and data management software, systems, and services. The company was founded in 1992 and is headquartered in Sunnyvale, California.
The table below presents the valuation metrics of NTAP, the data were taken from Yahoo Finance and finviz.com.
NetApp's valuation metrics are very good; The forward P/E is low at 12.87, the price-to-free-cash-flow is very low at 14.61, and the average annual earnings growth estimates for the next five years is pretty high at 10.94%.
Latest Quarter Results
On August 13, NetApp reported its first-quarter fiscal 2015 financial results, which beat EPS expectations by $0.03 (5.30%) and beat on revenue.
Net revenues for the first quarter of fiscal year 2015 were $1.49 billion. GAAP net income for the first quarter of fiscal year 2015 was $88 million, or $0.27 per share, compared to GAAP net income of $82 million, or $0.23 per share, for the comparable period of the prior year. Non-GAAP net income for the first quarter of fiscal year 2015 was $198 million, or $0.60 per share, compared to non-GAAP net income of $192 million, or $0.53 per share, for the comparable period of the prior year.
In the report, Tom Georgens, Chairman and CEO, said:
More large enterprises are relying on NetApp to help them bridge the on-premises architectures of today with the requirement to leverage multiple cloud services in the future. Our best-in-class portfolio is driving momentum, enabling us to invest in continued innovation while delivering shareholder value.
Dividend and Share Repurchase
NetApp started to pay a dividend in July 2013. The forward annual dividend yield is at 1.59%, and the payout ratio is only 31.7%. In May 2014, NetApp raised its quarterly dividend by 10% to $0.165 per common share.
Since the company generates lots of cash, and the payout ratio is very low, there is a good chance that the company will continue to raise its dividend payment.
NetApp ended the first quarter of fiscal year 2015 with $5.56 billion of total cash, cash equivalents and investments, and during the quarter generated $216 million in cash from operations. The company returned $172 million to shareholders during the quarter through share repurchases and a cash dividend. The next dividend in the amount of $0.165 per share will be paid on October 22, 2014 to shareholders of record as of the close of business on October 10, 2014.
In May 2014, NetApp announced that it would complete a planned $1 billion repurchase within one year, versus an earlier timeframe of two years. In May 2013, NetApp increased its share repurchase authorization to $3.0 billion from $1.4 billion.
A comparison of key fundamental data between NetApp and its main competitors is shown in the table below.
Source: Yahoo Finance, finviz.com
NTAP's Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the table below.
According to Portfolio123's "Balanced4" powerful ranking system, NTAP's stock is ranked fourth among all S&P 500 tech stocks, only Seagate (NASDAQ:STX), Western Digital (NYSE:WDC) and Symantec (NASDAQ:SYMC) are ranked higher (see my articles about STX, WDC and SYMC). The "Balanced4" ranking system is quite complex, and it takes into account many factors like; EPS consistency, technical analysis, valuation, profitability ratios and dividend information, as shown in the Portfolio123's chart below.
Back-testing over fifteen years has proved that this ranking system is very useful.
The charts below give some technical analysis information.
The NTAP stock price is 4.66% above its 20-day simple moving average, 9.84% above its 50-day simple moving average and 9.10% above its 200-day simple moving average. That indicates a short-term, mid-term and a long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is negative at 0.76 and ascending, which is a bullish signal (a rising MACD histogram that is crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 63.90 which do not indicate oversold or overbought conditions.
Many analysts are covering the stock, but their opinion is extremely divided. Among the thirty-seven analysts, four rate it as a Strong Buy, five rate it as a Buy, twelve-five analysts rate it as a Hold, two rate it as an Underperform, and one analyst rates it as a Sell.
TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering NTAP stock, there are eighteen analysts who have the four or five star rating, five of them recommend the stock, eleven analysts rate it as a Hold, and two rate it as a Sell.
Along with its latest quarter results, NetApp guided higher for the second-quarter. Management cited increasing demand for the company's hybrid cloud storage products.
Q2 Fiscal Year 2015 Outlook
The Company provided the following financial guidance for the second quarter of fiscal year 2015:
- Net revenues are expected to be in the range of $1.49 billion to $1.59 billion
- GAAP earnings per share is expected to be in the range of $0.45 to $0.50 per share
- Non-GAAP earnings per share is expected to be in the range of $0.66 to $0.71 per share
NetApp has been able to show earnings per share surprise in each one of the last four quarters, as shown in the table below.
In my opinion, the fact that the company succeeds to beat analyst expectations quarter after quarter demonstrates the strength of its business, and there is a good chance that NetApp will continue to surprise by reporting better than estimate results also in the future.
NTAP's stock has significantly underperformed the market in the last years. Since the start of the year, NTAP's stock has gained only 2.1% while the S&P 500 index has risen 8.0%, and the Nasdaq Composite Index has increased 9.1%. Moreover, since the beginning of 2012 NTAP's stock has gained only 15.8%, while the S&P 500 index has increased 58.8%, and the Nasdaq Composite Index has risen 74.9%. However, considering its good valuation metrics and strong earnings growth prospects, it is now an opportunity to buy a good stock at a cheap price.
I see strong revenue and earnings growth prospects for the company. NetApp provides solutions that enhance and optimize the current environment, while enabling full potential of newer architectures and delivery models over time. According to the company, about half of the company's top customers offer cloud-based services and purchase NetApp solutions for use in both internal enterprise IT and external cloud offering.
What price can be expected for NTAP's stock
In general, investors considering buying a new stock assume a target price for the stock that will give them a satisfactory return. They may rely on analysts' target price appearing on financial websites or make their calculation. In the case of NetApp, Yahoo Finance shows target price of $42.16, based on an average of 28 analysts, while the high target is at $55.00, and low target is at $34.00. That is certainly not very attractive price target for a stock trading around $42.00. However, considering the strength of NetApp's business, and its historical multiples, I have arrived at much higher target price.
I have compared the actual valuation multiples to their ten years averages and calculated the target price in accordance to the ten years averages. In order to obtain the averages, I have used YCHARTS' ten years charts, and since I have used charts and not numerical values, the averages are not mathematical accurate. The table below shows the actual values of six relevant valuation multiples, their ten years average, and the target stock price according to the ten years average, which calls for NTAP's stock price target of $66.00. Of course, this target price may look exaggerated, and no one guarantees that the stock will return to its historical valuation multiples' averages. However, it gives an idea to a possible price that the stock can achieve, if the company continues to prosper as I believe.
NetApp will continue to benefit from the increasing demand for the company's hybrid cloud storage products. NetApp has compelling valuation metrics and strong earnings growth prospects. NetApp has been able to show earnings per share surprise in each one of the last four quarters. Furthermore, NTAP's stock is ranked fourth among all S&P 500 tech stocks, according to Portfolio123's "Balanced4" powerful ranking system. NetApp is generating strong cash flows; its price-to-free-cash-flow is very low at 14.61, and returns value to its shareholders by stock buybacks and increasing dividend payments. All these factors bring me to the conclusion that NTAP's stock is a smart long-term investment.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.