Credit Suisse Fails To See Material Upside In NetApp

• NetApp Inc. NTAP shares have been on a downturn in 2015, and are down 34 percent year-to-date.
• Credit Suisse’s Kulbinder Garcha maintained a Neutral rating on the company, with a price target of $31.
• The SolidFire acquisition would boost NetApp’s performance in the long term, but is expected to have a negative impact in the near term, Garcha stated.

NetApp announced plans to acquire SolidFire for $870 million in cash. The move is in-line with the company’s efforts to shift its product portfolio towards the next gen data center, analyst Kulbinder Garcha said. The deal is scheduled to close in F4Q16.

SolidFire’s CEO, Dave Wright, would be leading the new SolidFire product line within NetApp. The acquisition boosts NetApp's product offerings in the three large All-Flash Array market segments, namely the traditional enterprise infrastructure, ultra high-performance applications and next gen infrastructure segment.

Management indicated that NetApp's organic FAS and EF Series product lines generate annualized revenues of $370mn. SolidFire will enable NetApp to access new customers who wish to “deploy hyper-scale, highly distributed, shared solutions, built on top of white box economics vs. Enterprise customers who value rich storage services,” Garcha noted.

The analyst commented that while the acquisition enhances NetApp’s long-term growth profile, there are certain negative impacts in the near term. Management has lowered its OM guidance for F2H16 to 16.5 percent, from its initial target of around 18 percent, and has indicated no material impact on revenue.

“For FY17 also, management does not expect a material impact on revenue but anticipates EPS dilution by $0.25-0.30, net of cost savings,” the Credit Suisse report stated.

The EPS estimates for FY16 and FY17 have been reduced from $2.43 to $2.30 and from $2.55 to $2.30, respectively, to reflect the impact of the acquisition. “While shares are inexpensive versus history, given concerns over long-term positioning and mixed execution, we do not see material upside,” Garcha added.