Cloud-based software company NetApp, Inc. (NTAP - Get Rating), which is based in Sunnyvale, Calif., reported stellar earnings for its fiscal first quarter, ended July 30. Its net revenues increased 12.3% year-over-year to $1.46 billion. This can be attributed to a 16% rise in its product revenues and a 155% rise in its NetApp public cloud revenues. Its non-GAAP net income came in at $263 million, up 61.3% from the same period last year, and its non-GAAP EPS was $1.15, beating the $0.95  consensus estimate by 21.1%.

High demand for NTAP’s industry-leading capabilities in the cloud space drove its performance in the last quarter. In addition, the company’s focused execution and demonstrated leadership have allowed it to emerge as a leading company in this space.

The stock has gained 7.8% in price since the earnings report was released on August 25. NTAP hit its 52-week price high of $91.29 on August 26.

Click here to check out our Cloud Computing Industry Report for 2021

Here’s what could shape NTAP’s performance in the near term:

Inorganic Growth

NTAP acquired big data processing and cloud analytics company Data Mechanics in June. Regarding this, NTAP Senior Vice President Anthony Lye said, “Adding Data Mechanics to our existing solutions will make it simpler and more cost-effective for organizations across all industries to fully leverage Apache Spark and Kubernetes to advance their data and cloud initiatives.”

The acquisition comes within a year of NTAP’s acquisition of leading compute management company Spot on July 22. Rebranded as Spot by NetApp, this cloud-based infrastructure platform has been a hit among application developers.

Structural Changes

NTAP President César Cernuda has implemented several structural and management changes to the go-to-market (GTM) model and global sales organization to boost its long-term growth. The customer- and partner-centric strategic and operational evolution should allow NTAP to become a leading player in the cloud industry. Its customer engagement model and hybrid cloud offering expertise are expected to address key markets and segments aggressively and expand its customer and partner base.

Regarding this, Cernuda said, “We are implementing these changes to better serve their needs. We will soon deliver a personalized, data-driven engagement model that allows our current and future customers to move at warp speed and aligns with the new way they want to engage with their solution partners.”

Stable Growth Prospects

NTAP expects its fiscal second quarter (ending October 2021) revenues to be between $1.49 billion to $1.59 billion, indicating a sequential improvement. Its non-GAAP EPS is expected to fall within the $1.14 – $1.24 range.

Analysts expect NTAP’s revenues to increase 8.5% year-over-year to $6.23 billion in the current year. Its EPS is expected to rise 21.2% from the same period last year to $4.92 in the current year. Also, the  Street expects the company’s revenue and EPS to rise 5.2% and 9.1%, respectively, year-over-year to $6.56 billion and $5.37 next year.

NTAP’s EPS is expected to rise at a 12% CAGR over the next five years. In addition, the company has an impressive earnings surprise history; it topped the consensus EPS estimates in each of the trailing four quarters.

Discounted Valuation

In terms of non-GAAP forward P/E, NTAP is currently trading at 17.43x, which is 30.7% lower than the 25.16X industry average. In addition, its 1.66 non-GAAP forward PEG ratio is 5.4% lower than the 1.76 industry average, and  the stock’s 10.73x forward EV/EBITDA is 35.6% lower than the 16.67x industry average.

NTAP’s  3.12 and 14.29 respective forward Price/Sales and Price/Cash Flow multiples of are significantly lower than the 4.17 and 22.94 industry averages.

POWR Ratings Reflect Rosy Prospects

NTAP has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

NTAP has an A grade for Quality. This is justified because  the company’s 14.49% net income margin is 141.3% higher than the 6.01% industry average.

Of the three stocks in the A-rated Technology – Storage industry, NTAP is ranked #2.

Beyond what we’ve stated above, we have rated NTAP for Growth, Value, Momentum, Sentiment, and Stability. Get all NTAP ratings here.

Bottom Line

NTAP’s solid fundamentals and continued business expansion should drive its growth in the coming months. Consequently,  analysts expect the stock to hit $90.38 in price soon, indicating a 3.8% potential upside. Moreover, as cloud computing gains traction during the current remote working era, NTAP is expected to benefit tremendously from the industry tailwinds. Thus, we think the stock should be a valuable addition to one’s portfolio now.

How does NetApp (NTAP) Stack Up Against its Peers?

While NetApp, Inc. (NTAP - Get Rating) has an overall B (Buy) rating, one  might want to consider looking at its peer Teradata Corporation (TDC - Get Rating), which has an overall rating of A (Strong Buy).

Click here to check out our Cloud Computing Industry Report for 2021

NTAP shares were trading at $87.37 per share on Monday morning, up $0.31 (+0.36%). Year-to-date, NTAP has gained 34.56%, versus a 21.44% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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