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NetApp slumps after SolidFire deal; RBC downgrades, sees lower M&A odds

Dec. 22, 2015 1:57 PM ETNetApp, Inc. (NTAP) StockNTAP, PSTGBy: Eric Jhonsa, SA News Editor
  • Believing the company is now "a less likely takeout candidate," RBC's Amit Daryanani has downgraded NetApp (NTAP -3.2%) to Sector Perform in response to its $870M deal to buy flash array vendor SolidFire, and cut his target by $10 to $28.
  • Daryanani also thinks SolidFire will add $65M-$75M in op. losses and dilute FY17 (ends April '17) EPS by $0.25-$0.30, while producing ~$100M in revenue. He also estimates SolidFire will account for less than ~2% of FY17 revenue, and thus doesn't see it doing much to halt ongoing sales declines. Lastly, the acquisition and future investments are seen placing "a downward bias on NTAP’s target of 18–20% op-margins."
  • Macquarie's Rajesh Ghai (Neutral rating) calls the purchase a "necessary strategic move" for NetApp, but has his share of concerns. "We believe Solidfire’s multi-tenant, scale- out, performance-optimized (QOS by application) all-flash storage architecture is differentiated, compelling and just the product architecture that the Storage market requires in the future and could bring about long-term stability in NTAP. However, despite NTAP Management’s claims to the contrary, we see the Solidfire product cannibalizing most of NTAP’s legacy FAS business initially with [addressable market] expansion into the Cloud most likely coming in the distant future."
  • William Blair's Jason Ader (Underperform rating): "While we applaud the proactivity of NetApp’s new management team in acquiring one of the premier private storage vendors on the market, we fear that the acquisition may be too little, too late ... SolidFire’s products are likely to cannibalize some of NetApp’s current revenue base (especially its [flash array] products), limiting short-term revenue gains. Plus, while SolidFire is a premium asset with a strong feature set, its high-end focus may not end up effectively shielding NetApp from continued competitive losses to other flash/hybrid and hyper-converged players who have been focused on the mid-tier and more standard enterprise customers."
  • Baird's Jayson Noland (Outperform rating) has cut his target by $5 to $35, but is staying bullish. "We believe the company has a revenue run-rate of about $100 million. [All-flash arrays are] a $2.5 billion market growing at a 50%. According to channel research, All-Flash can approach 15-20% share of the enterprise Storage market over the next few years. This acquisition is incrementally negative for Pure Storage (NYSE:PSTG). The AFA market is very competitive and NetApp plus SolidFire is a solid combination given the sizable NetApp install base."
  • Shares have made new multi-year lows, and are down 34% YTD.

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