'A Negative Inflection': Wells Fargo, Morgan Stanley React To NetApp's Q3 Sales Miss, Weak Guidance

NetApp Inc. NTAP shares were under pressure Thursday in reaction to third-quarter results released Wednesday after the market close that included a sales miss. 

The Analysts

Wells Fargo Securities analyst Aaron Rakers has a Market Perform rating on NetApp with a $70 price target.

Morgan Stanley analyst Katy Huberty maintained an Underweight rating and nudged up the price target from $58 to $59.

Wells Fargo: Demand Weakens In January

NetApp's Q3 results revealed all-flash growth of 19 percent year-over-year, a notable deceleration from the 29-percent growth reported in Q2, Wells Fargo's Rakers said in a Wednesday note.

The company blamed the weakness on macro uncertainty while downplaying competitive pressures, the analyst said. 

NetApp's all-flash results are a derivative negative for Pure Storage Inc PSTG, Rakers said. 

The quarter also saw cloud data services adoption reaching annualized monthly recurring revenue of $33 million ahead of broader cloud volume services availability, he said. 

"NetApp highlighted an increase in customer purchase approval requirements, with an increased focus on purchasing for current needs vs. building out for entire future requirements." 

The company reported incrementally cautious customer buying behavior in January, Rakers said. 

Following NetApp's below-consensus revenue guidance for Q4, Wells Fargo lowered its calendar 2019 and 2020 estimates.

Morgan Stanley: Quarter Marks Negative Inflection

Even as most enterprise tech companies reported better-than-feared results, NetApp posted below-consensus product revenue and guided below the Street for Q4, Morgan Stanley's Huberty said in a Thursday note. 

The analyst said she expects the consensus revenue estimates to be lowered toward Morgan Stanley's below-consensus view due to a combination of greater macroeconomic uncertainty, slowing product growth and below-target cloud data services.

Huberty forecast 3-percent revenue growth for FY20 compared to the guidance for mid-single digit growth, excluding the impact of enterprise license agreements. 

Among Morgan Stanley's key takeaways from the quarter are a deceleration in large enterprise spending in January, a behind-target cloud services business, free cash flow tracking below the target of 19-21 percent of revenue and an acceleration in deferred revenue. 

"With rising DSOs and no meaningful upside from falling NAND prices, bears will read this quarter as a negative inflection," Huberty said. 

Price Target

NetApp shares were down 5.79 percent at $63.45 at the time of publication Thursday. 

Related Links:

NetApp's Q1 Looks Solid, But ELAs Create Confusion

A Bullish Sell-Side Reacts To Pure Storage's Q3