Buy The Dip In NetApp, Analyst Says

NetApp Inc. NTAP reported a top-and-bottom line beat in its fiscal third quarter, but shares initially lost more than 7 percent mostly due to a decline in gross margins. The sell-off represents a buying opportunity for investors as the stock boasts significant upside, according to D.A. Davidson.

The Analyst

D.A. Davidson's Mark Kelleher upgraded NetApp's stock from Neutral to Buy with a price target boosted from $64 to $68.

The Thesis

Over the past two years, NetApp executed a "significant realignment" as it made an aggressive push into the Flash storage system market, Kelleher said in a note. Over the same time period the company has shown its strategic and growth products are succeeding in proving a "strong revenue tailwind" and boasts a strong cash flow.

The company's momentum hasn't changed much in the fiscal third quarter, which once again showed "significant product growth" and a "strengthening market position," the analyst said. The sell-off is likely attributed to a sequential decline in gross margins from 64.3 percent to 62.6 percent; at the same time, product sales of lower gross margin items rose 17 percent year-over-year and higher gross margin maintenance revenue was "down slightly."

NetApp's product gross margin improved from 44.5 percent in the same quarter a year ago to 49.1 percent and overall gross margin also rose from 61.5 percent to 62.6 percent, Kelleher said.

Price Action

Shares of NetApp are trading higher by about 4 percent in 2018.

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