But NetApp Is Still A Buy
The analysts are reeling in their targets for NetApp (NASDAQ: NTAP) but the stock is still a buy. At least 5 of the 21 analysts covering the stock have come out in the wake of the FQ4 earnings report and they all include price target reductions. The takeaway from the activity is there were no downgrades and the stock is still rated a Buy. The Buy rating is up from a Hold versus last year and steady and is accompanied by an attractive price target. The consensus of the 5 new targets is $89.40 compared to the $95.79 Marketbeat.com consensus and both are at least 25% above the current price action.
NetApp Moves Lower On Mixed Results And Guidance
Cloud services provider NetApp had a mixed quarter but only in terms of the analyst's estimates. The company produced $1.68 billion in net revenue for a gain of 7.7%. The mixed part is that revenue was only as expected while earnings were above expectations. Revenue strength was driven by a 68% increase in Public Cloud sales tempered by a smaller 4.7% increase in Hybrid Cloud. Product sales increased by 6% and services by 9.9%.
Moving down to the earnings, the news is equally mixed and equally tilted in the company's favor. The gross margin contracted by a small 75 basis points while the operating margin contracted by a wider 1200 basis points. The detail that makes the news “mixed” and not outright bearish is that operating margin contraction is due to one-off events in the prior year that have no bearing on operations. On an adjusted basis, the company’s margins expanded versus last year and drove outperformance on the bottom line. The GAAP EPS fell YOY but the adjusted earnings are up 21.3% versus last year and beat the Marketbeat.com consensus estimate by $0.14 or 1100 bps.
As mixed as the Q4 results were, it is the guidance that has the market on edge. The FY guidance is in-line with the consensus but assumes an improvement in operations in the back half of the year. The Q1 guidance, on the other hand, is calling for a contraction in both revenue and earnings that we fear may linger longer than execs anticipate. The billings data suggests momentum in the business but, to paraphrase Jamie Dimon, an economic hurricane is just over the horizon.
NetApp, A Value And High-Yield For Tech Investors
NetApp may be facing a downturn in the FQ1 period but the capital return program is not in danger. The company not only pays a healthy 2.75% dividend yield but also buys back shares and returned a total of $1.05 billion to shareholders last year. The dividend is only 40% of the EPS estimate and comes with a solid balance sheet and history of growth so we expect to see distribution increases continue if at a slower pace than the current 21% CAGR. On the buyback side of the equation, the company is committed to returning capital to shareholders and funding purchases from cash flow so we are also expecting this activity to continue as well.
The Technical Outlook: NetApp Steady Following Mixed Results
Price action in NetApp has been a little volatile post-release but seems to be confirming a bottom for the stock. The 30-day EMA is providing resistance but support is also strong at the $72 level and may push the action above the EMA. A move above the EMA would be bullish and supported by the indicators which suggest a reversal is in play. If the market can not get above the EMA we expect to see a retest of the $68 level and possibly lower.
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