NetApp (NTAP)
NetApp doesn’t excite us. Its sluggish sales growth shows demand is soft, a worrisome sign for investors in high-quality stocks.― StockStory Analyst Team
1. News
2. Summary
Why We Think NetApp Will Underperform
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.
- Muted 3% annual revenue growth over the last five years shows its demand lagged behind its business services peers
- Projected sales growth of 3.8% for the next 12 months suggests sluggish demand
- A bright spot is that its excellent adjusted operating margin highlights the strength of its business model
NetApp’s quality doesn’t meet our expectations. There are better opportunities in the market.
Why There Are Better Opportunities Than NetApp
NetApp’s stock price of $99.52 implies a valuation ratio of 12.9x forward P/E. NetApp’s valuation may seem like a bargain, especially when stacked up against other business services companies. We remind you that you often get what you pay for, though.
It’s better to pay up for high-quality businesses with higher long-term earnings potential rather than to buy lower-quality stocks because they appear cheap. These challenged businesses often don’t re-rate, a phenomenon known as a “value trap”.
3. NetApp (NTAP) Research Report: Q4 CY2024 Update
Data storage company NetApp (NASDAQ:NTAP) missed Wall Street’s revenue expectations in Q4 CY2024 as sales rose 2.2% year on year to $1.64 billion. On the other hand, the company expects next quarter’s revenue to be around $1.73 billion, close to analysts’ estimates. Its non-GAAP profit of $1.91 per share was in line with analysts’ consensus estimates.
NetApp (NTAP) Q4 CY2024 Highlights:
- Revenue: $1.64 billion vs analyst estimates of $1.69 billion (2.2% year-on-year growth, 3.1% miss)
- Adjusted EPS: $1.91 vs analyst estimates of $1.91 (in line)
- Adjusted EBITDA: $556 million vs analyst estimates of $552.7 million (33.9% margin, 0.6% beat)
- Revenue Guidance for Q1 CY2025 is $1.73 billion at the midpoint, roughly in line with what analysts were expecting
- Adjusted EPS guidance for the full year is $7.22 at the midpoint, missing analyst estimates by 1.5%
- Operating Margin: 22.1%, in line with the same quarter last year
- Free Cash Flow Margin: 20.6%, down from 27.9% in the same quarter last year
- Billings: $1.66 billion at quarter end, down 3.9% year on year
- Market Capitalization: $19.47 billion
Company Overview
Founded in 1992 when the digital storage industry was still in its infancy, 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.
NetApp's business is built around two main segments: Hybrid Cloud and Public Cloud. The Hybrid Cloud segment offers unified data storage solutions that help customers modernize their data centers with hardware and software that can handle various types of data. The Public Cloud segment provides cloud storage and operations services delivered primarily as-a-service.
At the core of NetApp's offerings is its ONTAP software, which serves as the foundation for its storage solutions. This software includes features like automatic ransomware protection, data transport capabilities, and storage efficiency tools. ONTAP allows customers to manage their data across different environments, from on-premises systems to hybrid and public clouds.
For hardware, NetApp offers several product lines including All-Flash FAS (AFF) systems for high-performance needs, Fabric Attached Storage (FAS) for high-capacity requirements, and specialized storage arrays for specific workloads. These systems can be configured to support various data types and performance needs.
In the cloud space, NetApp has positioned itself uniquely by embedding its storage services natively within major cloud providers. Customers can access NetApp storage directly through Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform. The company's BlueXP control plane allows customers to manage their entire data landscape through a single interface, simplifying operations across hybrid and multi-cloud environments.
A healthcare organization might use NetApp's storage systems to securely maintain patient records on-premises while using cloud-based analytics tools to improve treatment protocols. The data could seamlessly move between environments while maintaining security and compliance with healthcare regulations.
NetApp generates revenue through hardware sales, software licenses, subscription services, and professional services. The company sells through both direct sales channels and an ecosystem of partners, with indirect channels representing about three-quarters of its revenue. Its customer base spans various industries including financial services, government, healthcare, manufacturing, and telecommunications.
The company offers various consumption models, including traditional purchases, leasing, and its Keystone storage-as-a-service offering, which provides a pay-as-you-grow option for customers who prefer operational expenses over capital investments.
4. Hardware & Infrastructure
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 EMC storage division, Pure Storage (NYSE: PSTG), Hewlett Packard Enterprise (NYSE: HPE), and IBM (NYSE: IBM) in the storage hardware market. In cloud storage and data management, it faces competition from cloud providers themselves including Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), and Google (NASDAQ: GOOGL).
5. Sales Growth
Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.
With $6.51 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. To accelerate sales, NetApp likely needs to lean into pricing or international expansion.
As you can see below, NetApp grew its sales at a tepid 3% 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 history shows its demand has slowed as its revenue was flat over the last two years. 
NetApp also reports its billings, or the amount it invoiced to customers. This metric reached $1.66 billion in the latest quarter and disregards revenue recognition rules, painting a more accurate picture of sales activity. Over the last two years, NetApp’s billings were flat. Because this number is in line with its revenue growth, we can see the company delivered its commitments in a timely manner. 
This quarter, NetApp’s revenue grew by 2.2% year on year to $1.64 billion, falling short of Wall Street’s estimates. Company management is currently guiding for a 3.4% year-on-year increase in sales next quarter.
Looking further ahead, sell-side analysts expect revenue to grow 4% over the next 12 months. Although this projection implies its newer products and services will spur better top-line performance, it is still below the sector average.
6. Adjusted Operating Margin
Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.
NetApp has been a well-oiled machine over the last five years. It demonstrated elite profitability for a business services business, boasting an average adjusted operating margin of 24.5%.
Analyzing the trend in its profitability, NetApp’s adjusted operating margin rose by 7.6 percentage points over the last five years, as its sales growth gave it operating leverage.
This quarter, NetApp generated an adjusted operating profit margin of 30%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.
7. Earnings Per Share
We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.
NetApp’s EPS grew at a remarkable 11.6% compounded annual growth rate over the last five years, higher than its 3% 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 adjusted operating margin was flat this quarter but expanded by 7.6 percentage points over the last five years. On top of that, its share count shrank by 9.2%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth. 
In Q4, NetApp reported EPS at $1.91, down from $1.94 in the same quarter last year. This print was close to analysts’ estimates. Over the next 12 months, Wall Street expects NetApp’s full-year EPS of $7.13 to grow 8.6%.
8. Cash Is King
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
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 18.1% over the last five years.
Taking a step back, we can see that NetApp’s margin expanded by 1.4 percentage points during that time. This is encouraging because it gives the company more optionality.
NetApp’s free cash flow clocked in at $338 million in Q4, equivalent to a 20.6% margin. The company’s cash profitability regressed as it was 7.3 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends carry greater meaning.
9. Balance Sheet Assessment
Businesses that maintain a cash surplus face reduced bankruptcy risk.
NetApp is a profitable, well-capitalized company with $2.26 billion of cash and $1.99 billion of debt on its balance sheet. This $267 million net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.
10. Key Takeaways from NetApp’s Q4 Results
We struggled to find many positives in these results. Its revenue missed significantly and its EPS guidance for next quarter fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 1.6% to $94.13 immediately following the results.
11. Is Now The Time To Buy NetApp?
Updated: May 22, 2025 at 11:53 PM EDT
The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in NetApp.
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 don’t see anything changing 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 flat billings disappointed.
NetApp’s P/E ratio based on the next 12 months is 12.9x. Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now.
Wall Street analysts have a consensus one-year price target of $115.96 on the company (compared to the current share price of $99.52).
Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.
Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.
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