NetApp (NTAP)

Data storage company NetApp (NASDAQ:NTAP) announced better-than-expected revenue in Q1 CY2025, with sales up 3.8% year on year to $1.73 billion. On the other hand, next quarter’s revenue guidance of $1.53 billion was less impressive, coming in 4.5% below analysts’ estimates. Its non-GAAP profit of $1.93 per share was 1.8% above analysts’ consensus estimates.

Company Overview

Founded in 1992 as a pioneer in networked storage technology, NetApp (NASDAQ:NTAP) provides data storage and management solutions that help organizations store, protect, and optimize their data across on-premises data centers and public clouds.

The Hardware & Infrastructure sector will be buoyed by demand related to AI adoption, cloud computing expansion, and the need for more efficient data storage and processing solutions. Companies with tech offerings such as servers, switches, and storage solutions are well-positioned in our new hybrid working and IT world. On the other hand, headwinds include ongoing supply chain disruptions, rising component costs, and intensifying competition from cloud-native and hyperscale providers reducing reliance on traditional hardware. Additionally, regulatory scrutiny over data sovereignty, cybersecurity standards, and environmental sustainability in hardware manufacturing could increase compliance costs.

NetApp competes with Dell Technologies (NYSE:DELL) through its storage division Dell EMC, Pure Storage (NYSE:PSTG) in the all-flash storage market, and Hewlett Packard Enterprise (NYSE:HPE). In cloud storage, it faces competition from cloud providers' native storage offerings from Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and Google (NASDAQ:GOOGL).

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $6.57 billion in revenue over the past 12 months, NetApp is one of the larger companies in the business services industry and benefits from a well-known brand that influences purchasing decisions. However, its scale is a double-edged sword because it’s harder to find incremental growth when you’ve penetrated most of the market. For NetApp to boost its sales, it likely needs to adjust its prices, launch new offerings, or lean into foreign markets.

As you can see below, NetApp’s sales grew at a tepid 4% compounded annual growth rate over the last five years. This shows it failed to generate demand in any major way and is a rough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within business services, a half-decade historical view may miss recent innovations or disruptive industry trends. NetApp’s recent performance shows its demand has slowed as its annualized revenue growth of 1.6% over the last two years was below its five-year trend.

This quarter, NetApp reported modest year-on-year revenue growth of 3.8% but beat Wall Street’s estimates by 0.7%. Company management is currently guiding for flat sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 4.1% over the next 12 months. While this projection suggests its newer products and services will catalyze better top-line performance, it is still below the sector average.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

NetApp has been a well-oiled machine over the last five years. It demonstrated elite profitability for a business services business, boasting an average operating margin of 18.4%.

Looking at the trend in its profitability, NetApp’s operating margin rose by 2.4 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, NetApp generated an operating margin profit margin of 20.1%, down 1.9 percentage points year on year. This reduction is quite minuscule and indicates the company’s overall cost structure has been relatively stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

NetApp’s EPS grew at a remarkable 12.2% compounded annual growth rate over the last five years, higher than its 4% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into NetApp’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, NetApp’s operating margin declined this quarter but expanded by 2.4 percentage points over the last five years. Its share count also shrank by 7.2%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q1, NetApp reported EPS at $1.93, up from $1.80 in the same quarter last year. This print beat analysts’ estimates by 1.8%. Over the next 12 months, Wall Street expects NetApp’s full-year EPS of $7.27 to grow 5.8%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

NetApp has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the business services sector, averaging 18.8% over the last five years.

Taking a step back, we can see that NetApp’s margin was unchanged during that time, showing its long-term free cash flow profile is stable.

NetApp’s free cash flow clocked in at $640 million in Q1, equivalent to a 37% margin. This result was good as its margin was 3 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends trump fluctuations.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

NetApp is a profitable, well-capitalized company with $3.85 billion of cash and $3.24 billion of debt on its balance sheet. This $611 million net cash position is 3% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was good to see NetApp narrowly top analysts’ revenue expectations this quarter. We were also happy its EPS outperformed Wall Street’s estimates. On the other hand, its EBITDA missed and revenue guidance for next quarter fell short. Overall, this was a weaker quarter. The stock traded down 5.1% to $94.25 immediately after reporting.

Updated: June 20, 2025 at 12:09 AM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

NetApp isn’t a terrible business, but it doesn’t pass our quality test. For starters, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while NetApp’s powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits, its billings growth has disappointed.

NetApp’s P/E ratio based on the next 12 months is 13.4x. Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $114.52 on the company (compared to the current share price of $104.21).