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NetApp Is Cheap But A Long-Term Value Trap

May 03, 2020 2:34 PM ETNetApp, Inc. (NTAP)AMZN, MSFT, NTNX, VMW7 Comments


  • NetApp is trading at ~10 times historical earnings and a yield of ~4.5% with a good chance of returning to around $55 per share.
  • Capital distributions of dividends and buybacks have exceeded operating cash flow for most years recently and this looks set to continue.
  • Hybrid cloud remains an opportunity but competition is strong and revenue growth is negative despite solid profitability.
  • Although there is a short-term trade opportunity from ~$45 to $55, for long-term investors NTAP is a value trap.

NetApp is cheap for a reason

Overpaying for growth is the main risk for technology investors; however, cheap technology stocks also have risks. A "value trap" investment looks solid and profitable whilst being priced soundly on the market. But once you examine the business fundamentals without rose colored glasses, it is clear that the company has already started the long gentle slide into this good night. In our recent travels looking for market sell-off bargains, we thought our review of NetApp's (NASDAQ:NTAP) situation was worth sharing.

So, this week we review NetApp as part of our Global Technology Growth Star investment strategy. In this strategy, we focus on strongly growing technology companies with a market capitalization in the range of 1-100 billion USD, not just in the United States, but from around the world. We look at our standard tests to consider if NTAP is worth investing for our technology strategy as either a growth or a value stock.

What does NetApp do? Data storage, particularly flash private cloud.

Founded in 1992, when George Bush Senior was planning his reelection bid, NetApp is a grand old dame of data storage. The classification as a hardware company may seem harsh with software management of data storage vital, particularly in these days of hybrid cloud. However, hardware sales are still a key component of NetApp's pitch as a hybrid cloud provider, linking and balancing LAN and WAN storage to the public cloud.

The key to NTAP is whether it can restart growth. A technology company with declining sales is a dead man walking, even if that decline is profitable and gentle. The demand for data storage is far from declining with an explosion of need from Internet of Things, healthcare research, data mining, artificial intelligence and more.

Test 1: Growth - Can a mature firm

This article was written by

CGP Asset Management manages discretionary trading accounts for clients in a “Global Technology Growth” strategy. This strategy combines quantitative and qualitative elements with a global perspective. The parent company Caterer Goodman Partners was co-founded by Owen Caterer in 2011 as a financial advisory firm, but since 2017 has focused exclusively on discretionary trading accounts on Interactive Brokers.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (7)

NTNX is a good long term play in this space.
Anything on premise, whether NTNX, NTAP, etc is a losing bet long term equivalent to buggy whip manufacturers when the Model T came out. The move to the cloud continues to accelerate and this economic downturn will only accelerate it.

Nutanix makes the best on premise solution, but gaining market share of a shrinking space is a losing proposition.
Caterer Goodman Partners profile picture
Initially I thought so, but just a quick glance at revenues had me thinking otherwise. Where is their growth? They aren't bad, but I don't think anyone in the on-premises is winning and Netapp management seems to be simply marking time and managing the balance sheet. There is a strong chance storage will be either cloud, or software defined with the hardware being commoditized. Discussions of hybrid cloud are just a distraction.
Caterer Goodman Partners profile picture
That's a pretty good summary Salespunk.
what do u like more
Caterer Goodman Partners profile picture
My next article was on SEDG, which I like more. There will be another selloff of emerging markets soon, and that will be a good time to build a position in PAGS. I've written about both recently.
jhod58 profile picture
100% agree
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