NetApp Q3 Earnings Analysis: Will Higher Margins And Cloud Sales Drive Stock Higher? NetApp Q3 Earnings Analysis: Will Higher Margins And Cloud Sales Drive Stock Higher?

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Awaiting Q3 FY’24 Results

As NetApp (NASDAQ:NTAP) gears up to unveil its Q3 FY’24 results in late February, investors are rife with anticipation. Expectations are set for the company to report revenues of around $1.6 billion, slightly surpassing estimates and marking a 4% increase over the previous year. Earnings are anticipated to hover around $1.69 per share, aligning with the consensus estimates.

Market Performance and Headwinds

NetApp’s flagship Hybrid Cloud business has encountered obstacles in the form of reduced information technology spending and cost-cutting endeavors by major corporations. The company witnessed a 6% year-over-year revenue decline in Q2 FY’24, dropping from $1.66 billion to $1.56 billion compared to FY’23, with adjusted earnings remaining flat. However, there is optimism that the tide may turn slightly in Q3’FY’24. Despite these challenges, NetApp’s public cloud business is gaining traction, with revenues up 8% year-over-year in the previous quarter.

While the public cloud business accounts for less than 10% of total revenue, it holds significance in light of the industry’s shift towards cloud-based storage. Furthermore, NetApp’s margins are showing promise, with the company reporting record adjusted consolidated gross margins of 72% in Q2. This bodes well for the company and its stakeholders.

Stock Performance and Prospects

NTAP stock has displayed strong gains, rising 30% from early January 2021 levels of $65 to around $85 at present. However, this surge has been irregular, with returns at 39% in 2021, -35% in 2022, and 47% in 2023. It’s worth noting that NetApp lagged behind the S&P 500 in 2022, a period where even industry heavyweights struggled to outperform the market.

Given the current market volatility, the question arises whether NetApp will face a situation akin to 2022 and underperform the S&P in the next 12 months. This speculation looms large, but there are compelling arguments that the company is well-positioned to weather the storm. NetApp’s measures to trim costs and bolster profitability along with its strong foothold in traditional storage solutions, particularly in key areas such as all-flash arrays, serve as pillars of support. In addition, the company’s current valuation is deemed attractive, trading at slightly over 14x consensus FY’24 earnings.

Conclusion and Looking Ahead

As investors await NetApp’s Q3 results, there is a sense of cautious optimism. The company’s ability to navigate challenges and capitalize on opportunities will be the centerpiece of discussions post-earnings release. Despite the headwinds, there is a prevailing sentiment that NetApp’s strong positioning in the hybrid cloud and traditional storage segments, combined with its focus on efficiency and profitability, could yield positive outcomes both in the near term and the long run.

Returns Feb 2024 MTD [1] Since start of 2023 [1] 2017-24 Total [2]
NTAP Return 0% 45% 147%
S&P 500 Return 4% 31% 125%
Trefis Reinforced Value Portfolio 4% 43% 635%

[1] Returns as of 2/16/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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