Analysts Upgrade NetApp Before Q3 Report: 'We Expect Revenues To Continue To Outgrow The Market'

NetApp Inc. NTAP earned upgrades from two sell-side analysts who praised the storage and data management name's fundamentals. 

NetApp is scheduled to release its third-quarter earnings report Feb. 14 and its analyst day is set for April 5.

The Analysts

• Loop Capital Markets analyst Ananda Baruah upgraded NetApp from Hold to Buy with a $69 price target, suggesting 20-percent upside.
• Bank of America Merrill Lynch analyst Wamsi Mohan upgraded the shares from Neutral to Buy and increased the price target from $63 to $74.

Loop Capital: NetApp Has Business Momentum Ahead 

NetApp shares have appreciated about 170 percent over the last two years, thanks to business model optimization, share repurchases, an acceleration of All-Flash-Array, or AFA, demand and the resurgence in demand for hybrid cloud and multi-cloud projects, Baruah said in a Tuesday note. 

NetApp has business model momentum ahead, ongoing AFA adoption and new market opportunities as spending on cloud accelerates in 2019, the analyst said. 

Loop Capital expects both revenue and operating margin to expand to mid-single digit and 23-percent growth, respectively.

On valuation, Baruah said NetApp shares can sustain its 15 times P/E.

See also: NetApp Poised For 'Continued Outperformance'; BMO Upgrades

BofA: Revenues Should 'Continue To Outgrow The Market'

Continued strength and conversion to AFA, where NetApp has No. 2 positioning; stabilization in mature revenue; and incremental revenue and margin opportunity with cloud data fabric could result in sustained top-line growth, BofA's Mohan said in a Tuesday note. 

AFA sales now account for 40 percent-plus of NetApp's product revenues, with revenue in the third quarter of calendar 2017  from AFA products landing at $331 million, representing 56 percent year-over-year growth, the analyst said. The rate of growth outpaced the rate 38-percent rate in the AFA market as a whole, according to BofA. 

"We expect NetApp AFA revenues to continue to outgrow the market in calendar 2018, and expect it to be up 35 percent year-over-year," Mohan said. 

BofA estimates 12-percent product revenue growth and 7-percent total revenue growth, outperforming Street estimates of 5-percent growth.

Mature products — consisting of add-on hardware, OEM sales and FAS systems sold with ONTAP 7 OS — are no longer a headwind in calendar 2018, Mohan said. The segment accounted for 31 percent of NetApp revenue in the previous quarter. 

BofA raised its 2018 NetApp earnings estimate to $3.48 per share and $4.09 per share for 2019. This compares to the consensus estimates, which call for earnings of $3.37 per share and $3.88 per share, respectively.

The Price Action

Shares of NetApp are up over 51 percent over the past year, while the year-to-date gains are trimmed to about 8 percent due to the market-wide pullback seen last week.

At the time of publication, the stock was up 2.34 percent at $59.08. 

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