Goldman Sachs Turns Bullish On NetApp, Upgrades Pure Storage To Neutral

The outlook for the storage market bodes especially well for NetApp Inc. NTAP while the bearish case for Pure Storage Inc PSTG is no longer warranted, according to Goldman Sachs.

The Analyst

Goldman Sachs' Rod Hall upgraded NetApp's stock rating from Neutral to Buy with a price target lifted from $76 to $91 while also adding the stock to Goldman Sach's "Conviction List." The analyst also upgraded Pure Storage's stock rating from Sell to Neutral with a price target lifted from $18 to $23.

The Thesis

The improved outlook for the storage market is twofold, Hall said in a research report. (See his track record here.)

First, after stable average annual spending of under $25 billion per year from 2012 to 2014 cumulative storage spending dipped by around $4 billion from 2015-2017.

Around $1 billion of the underspending will be "caught up" by the end of 2018, while "catch up spending" will continue well into 2019, he said. 

NAND accounts for around 30 percent of total all-flash array costs, which implies falling NAND prices will help lift storage companies' gross profits.


NetApp remains well-positioned to take advantage of favorable industrwide trends in the storage market, Hall said in the upgrade note.

At the company level, NetApp continues to win share in the AFA market and is positioned to grow its software subscription revenue from the cloud as part of its Cloud Data Services, the analyst said. In addition, falling NAND prices could result in "significant" near-term gross margin expansion, Hall said. 

Competitive concerns from Dell and EMC are likely overblown, as both third-party data and firsthand checks suggest Dell/EMC has a "significant amount of work" ahead on the path to rationalize its portfolio, the analyst said. 

NetApp has the ability to gain market share in the near term, although competitive pressures from Dell and EMC are future risks, Hall said. 

Related Link: NetApp's Q1 Looks Solid, But ELAs Create Confusion

Pure Storage

Pure Storage should benefit from similar industrywide tailwinds, which implies a bearish stance on the stock can no longer be justified, Hall said in a separate upgrade note. Pure Storage has been "losing ground" in the AFA market, and Goldman's revenue outlook for 2019 is merely in line with consensus estimates, including the potential for continued revenue and EBIT margin growth through fiscal 2021.

The company has a differentiated FlashBlade offering, which is a "no-frills solution" for cheap and scalable flash, Hall said. The products could also have on-premise analytics and artificial intelligence use cases, as each blade is engineered to deliver 100Gbps of IO — which is exactly what is required to fully saturate a GPU for model training, he said. 

Price Action

NetApp shares were up 0.78 percent at the time of publication Wednesday, while Pure Storage was up 1.24 percent. 

Related Links: Despite 'Executing Well,' Pure Storage Catches Analyst Downgrade

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