NetApp (NASDAQ:NTAP) Is A High-Yield Reversal Story In-Progress

NetApp, The Future Is In The Cloud

NetApp (NASDAQ:NTAP) has been a MarketBeat favorite since early in the pandemic. My colleague Jea Yu recently called the stock out as a defensive play citing its value, yield, and outlook for growth. The company’s push to the cloud is at the center of its success providing a path to growth that otherwise wouldn’t have come. The company just released its calendar 3Q report more than confirming its place in an industry expected to grow at a double-digit CAGR for the next five to ten years. Along with that, the stock offers value and yield you can’t get with most other tech stocks.

“We are a primary beneficiary of the increasing importance of data and are uniquely positioned to help customers with their digital transformations. I am confident in our ability to drive long-term growth, extend our hybrid cloud leadership, and deliver value for customers, partners, and shareholders,” said George Kurian, chief executive officer.

NetApp Beats The Consensus, Guides Higher

NetApp delivered a solid quarter that not only saw sequential improvement but growth and revenue above the pre-COVID rate. The company’s net revenue came in at $1.42 billion or up 9.02% QoQ and 3.6% from the same quarter last year. Revenue was driven by robust gains in Maintenance and Public Cloud and beat the consensus by 830 basis points.

“In the second quarter, NetApp again delivered strong results, successfully executing against our plan to scale our cloud business while growing in the storage market. We also introduced significant new products and services which further advance our Data Fabric strategy,”

On a segment basis the core products segment saw revenue fall -2.9% while all others posted gains. Software Maintenance increased 19.3%, Hardware Maintenance increased by 5.2%, and the Public Cloud Services annualized run-rate by a monster 200%. Moving down the report, cash from operations reversed a loss in the prior-year coming in at $161 million versus ($53 million). On the bottom line, the GAAP and adjusted earnings both fell from last year but also beat their consensus targets by wide margins. Total cash and equivalents increased to $3.65 billion.

Looking forward, the company guided the 3rd quarter in a range above the consensus. The $1.34 to $1.49 billion in revenue isn’t exactly above the consensus, it brackets the consensus with consensus below the mid-point. The new range for EPS of $0.94 to $1.02 is above the consensus and getting the market exited.

NetApp, Still A Value At $60

NetApp’s value proposition has changed somewhat over the last two months but there is still a value to be had. The stock is trading at only 14X this year’s and 12X next year’s earnings making a great choice versus the broad market and a reasonable value versus its peers. Shares of Seagate Technology (NASDAQ:STX) are trading roughly inline with NetApp while VMWare (NASDAQ:VMW) is trading at a more lofty 20X earnings.

In terms of the dividend, NetApp is paying roughly 3.5% compared to the 1.65% average for the S&P 500 and 0.0% for VMWare. Competitor Seagate Technology is paying a similarly safe 4.45% and another opportunity for value-minded income investors.

On a technical basis, shares of NetApp surged more than 10% on the news to test resistance at the pre-Covid high. The candle is strong and supported by the indicators so I expect to see higher prices in the future. Once resistance at the $60 is worn down the stock should move up to the $64 and $70 levels in quick succession.