NetApp's Multiple Has Room For Downside In Current Cloud Business Digestion Period, Analyst Says

  • Morgan Stanley analyst Meta Marshall downgraded NetApp Inc NTAP from Equal-Weight to Underweight and lowered the price target from $66 to $58.
  • The re-rating reflected the analyst's view that NTAP's multiple has room for downside in the current period of cloud business digestion, which had been the driver of premium in the name.
  • NetApp reported a disappointing outlook for their premise and cloud businesses on their Q2 earnings last month
  • NTAP began to see negative estimate revisions following a recovery in IT spending post-COVID.
  • The company saw sweating of premise assets and digestion on the cloud business. 
  • Company commentary from the most recent NASDAQ conference noted that this digestion period would likely be multi-quarter. 
  • The commentary made the analyst more unsure that estimate revisions were complete, particularly given the more challenging visibility NTAP has to this portion of the business. 
  • The combination of estimates was more at risk of near-term revisions and underperformance of the asset, putting the name at risk of underperformance over the next 12 months. 
  • Valuation has compressed, but re-rating likely requires better confidence in estimates.
  • PCS business is a key value driver, but the trajectory remains unknown heading into the potential cloud digestion period.
  • Price Action: NTAP shares traded lower by 0.51% at $64.96 on the last check Tuesday.
  • Photo Via Wikimedia Commons
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