NetApp Reports Largely Positive Q2: The Sell-Side Reacts

NetApp Inc. NTAP reported Wednesday after the market close with above-consensus second-quarter non-GAAP EPS results and 7-percent revenue growth.

The cloud data company's third-quarter non-GAAP EPS guidance was above consensus, and the revenue guidance surrounded the consensus expectations.

The Analysts

Bank of America Merrill Lynch analyst Wamsi Mohan reiterated a Buy rating on the shares with a $90 price target.

Wells Fargo Securities analyst Aaron Rakers has a Market Perform rating and $80 price target.

BofA's 5 Reasons For Liking NetApp

BofA's Mohan listed the following five factors behind the firm's bullish stance on NetApp:

• Strong free cash flow generation that presents the potential for a positive earnings estimate reset.
• The preservation of margins despite aggressive pricing to counter competition.
• Sustained product growth, with all-flash array, or AFA, becoming a larger piece of the mix.
• The potential for buybacks adding to growth.
• Incremental opportunity with cloud and HyperConverged.

The AFA portfolio is running at a robust $2.2-billion annual run rate despite slight deceleration, the analyst said.

Cloud revenues increased from $20 million in the previous quarter to $27 million and possess the potential to become a $45-million business in 2019, Mohan said. 

Citing the Q2 beat, BofA raised its Q3 EPS estimate by a penny to $1.16 and the 2019 EPS estimate by 10 cents to $4.61.

BofA does see a minor revenue miss, excluding enterprise license agreements; the deceleration in product revenue; in-line guidance despite federal order pushouts from Q2; slow progress on cloud data revenue; weaker FCF; and the prospect of competitive pressure from Dell Technologies Inc DVMT/EMC as sore points.

Wells Fargo Sees Growth In Cloud Data Services 

Investors are likely to focus on the deceleration in AFA growth, said Wells Fargo's Rakers.

The analyst estimates that adjusted Q2 AFA year-over-year growth may been in the mid-20-percent range compared to the low 30s in Q1.

"We think investors will be focused on NetApp's comments [that] it has not lowered AFA prices despite lower NAND Flash pricing." 

Investors may also focus on the impact of recurring ELA contributions going forward, Rakers said. 

Tthe cloud data services business is the next chapter in NetApp's growth story, he said. 

NetApp is targeting $400 to $600 million annually in software-only subscription revenue exiting 2020, according to Wells Fargo. 

The Price Action

NetApp shares were down nearly 12 percent at $68.69 at the time of publication Thursday. 

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