NetApp Inc. (NTAP) is a pure-play data storage company, providing enterprise network storage and data management solutions, including storage hardware, software and services, notes Jim Kelleher, analyst with Argus Research.
In May 2011, at the beginning of FY12, NetApp acquired Big Data hardware provider Engenio; and in February 2016, it acquired all-flash array maker SolidFire.
The company has laid out fairly aggressive operating and capital goals for the next several years, signaling management and the board’s confidence in overall industry trends and NetApp’s position within the storage market.
With a single quarter of fiscal 2018 remaining, the company offered preliminary fiscal 2019 guidance that includes EPS growth of at least 15%; mid-single-digit revenue growth and free cash flow exceeding $1 billion.
The company is confident it can sustain that level of sales and EPS growth at least through fiscal 2021. NetApp’s board approved an additional share repurchase authorization of $4 billion. From the current $0.80 annual payout, the company intends to double its dividend by fiscal 2021.
Additionally, management has set a goal of increasing free cash flow to the equivalent of 24% of revenue, from the current highteen percentages. NetApp is taking aim at the cloud data service business where it is partnering with cloud titans including Amazon Web Services and Microsoft Azure.
Over the long term, we expect the tech sector to benefit from pervasive digitization across the economy, greater acceptance of transformative technologies, and the development of the Internet of Things (IoT). Healthy company and sector fundamentals are also positive. For individual companies, these include high cash levels, low debt, and broad international business exposure.
Reflecting our more positive near-term and long-term growth outlook for NetApp, new free cash flow growth goals for the company, and higher net margin based on lower taxes and operating leverage, our revised discounted free cash flow analysis suggests a value in the low-$100s, in a rising trend from the low-$70s one year ago. We have calculated a blended value for NTAP in the low- to mid-$80s, in a rising and in fact accelerating trend.
James Kelleher is an analyst with Argus Research
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