NetApp Concerns Mount: Sterne Agee CRT Downgrades, Longbow Research Sees More Sales Disappointments Coming

Wall Street's concerns for NetApp Inc. NTAP are escalating, as Sterne Agee downgraded the stock to Underperform and Longbow sees more sales disappointments from the storage vendor.

Legacy vendors such as Sunnyvale, California-based NetApp, EMC Corporation EMC and Dell are losing market share to smaller vendors such as Pure Storage Inc PSTG, Nimble Storage Inc NMBL, Nutanix, SimpliVity and Tintri. Last month, Cisco Systems, Inc. CSCO too entered the frame with its Hyperflex product.

Sterne Agee Reports

Sterne Agee cut the rating on NetApp shares to Underperform and slashed the price target by $2 to $22, saying that it sees the stock underperforming peers with limited near-term options to stabilize product growth.

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Sterne Agee's first-quarter survey showed continued weakness in end-user budgeting for Storage systems and upgrades, as the customer sentiment is shifting towards smaller vendors who offer all-flash array (AFA) solutions at competitive prices. As such, legacy vendors such as NetApp are cutting prices to gain customers that could lead to margin erosion.

"We expect catalysts such as the transition to ONTAP 8 (still under half of customer capacity) and the introduction of SolidFire (AFA) to the NetApp channel will not offset enough share loss potential over the next year," analyst Alex Kurtz wrote in a note to clients.

NetApp's SolidFire product is gaining traction, but its growth may cannibalize existing storage solutions of NetApp.

NetApp is expected to report its fourth-quarter results in late May, and Kurtz expects the company to highlight challenging April/July quarter product growth outlooks.

Longbow's Take

Meanwhile, Longbow Research sees more sales disappointments from NetApp, while cost savings could stabilize earnings forecasts in FY17.

"NetApp continues to struggle with its image of being technologically 'behind' relative to new-guard storage startups," analyst Joe Wittine wrote in a client note.

"While NTAP's 'high-end' converged platform FlexPod has its place, NetApp is missing opportunities on the low end hyperconverged market, as channel partners are instead investing in Nutanix, SimpliVity, Tintri, and now Cisco's new Hyperflex. NTAP is poised to lose share in a declining market in FY17," the analyst added.

Wittine, who remains Neutral on NetApp shares, sees near-term catalysts as "relatively balanced."

The analyst said the company's base business getting worse and expects a minimum drop of high single digit in FY17 and more gross margin risk.

"If pressed we would be short before we were long on the potential for more organic sales misses, and potential multiple degradation to 10x forward earnings, vs. current valuation at 11.6x FY16 consensus and 10.8x FY17 consensus, but not enough to justify 20 percent downside for an Underperform rating," Wittine noted.

Shares of NetApp fell 2.71 percent to $24.44 shortly after Monday's opening bell.