Why NetApp Looks Like a Good Investment

NetApp is poised to benefit from growth in data storage. Let’s see how.

Mar 21, 2014 at 6:00PM

Storage equipment vendor NetApp (NASDAQ:NTAP) plies its trade in a fast-growing industry. It is reaping the benefits of the data boom, and its recently released third-quarter results indicate the same. NetApp competes in the very competitive data storage devices industry against VMware (NYSE:VMW) and Hewlett-Packard (NYSE:HPQ), but it has done well despite tough competition. For example, in the recent quarter, NetApp's earnings grew 21% year-over-year, and considering its various strategies, the company can continue growing in the future.

Storage gaining steam
NetApp's storage equipment business is doing quite well, as the company is gaining market share. Despite subdued U.S. federal IT spending, NetApp is expecting market share gains as a result of its differentiated product portfolio. 

Since most of the IT organizations are going through a transition, adopting new technology and delivery models, NetApp's strategy of delivering innovative, flash-accelerated solutions is expected to bring more customers into its fold. However, the transition is leading to slower decision making and longer sales cycles. As a result, customers are adding flash at all layers of their storage hierarchy and are shifting to an integrated mix known as hybrid cloud.

This customer shift is expected to result in better business opportunities in the future. Being the market leader in flash and converged infrastructure, NetApp offers a differential approach to cloud and software defined storage, attracting customers to its new, innovative technology.

Diversified solutions and applications
NetApp provides versatility, efficiency, and ubiquity through its solution, known as Data ONTAP, which enables customers to build solutions specific to their needs. NetApp's strategy of working with service providers, such as hyperscalers, has proven good for the company, resulting in an IDC ranking as the leading provider of storage capacity for public cloud infrastructure.  

Netapp delivers storage services across a broad range of hardware, eliminating the limitations and complexity of traditional hardware silo models. Further, the applicability of clustered ONTAP has opened up more opportunities for the company. This is expected to increase customer base and help NetApp outperform in the future. 

Moving on, the company's flash storage business is also gaining momentum. The company's introduction of new EF550 with greater performance and capacity than the previous generation EF540 leads to the addition of more EF customers. Besides EF customers, NetApp is also seeing strong demand for its FAS systems.

With the growing popularity of EF and FAS systems, NetApp sees itself as a leader in the flash market. Further, the company will soon be introducing its first generation of cluster-optimized FAS platforms, which will enable customers to deploy a wider range of performance, availability, and capacity options to manage the clustered ONTAP.

Also, NetApp is sticking to its cost-saving initiatives and plans to reduce its workforce. The company slashed over 900 jobs in 2013 and is planning to decrease the headcount by another 600 this year, citing reduced demand from U.S. federal agencies and constricted IT spending. NetApp will have to pay nearly $35 million-$45 million in compensation to realign its business operations. This will have a negative impact on the company's fourth-quarter earnings, but should lead to better bottom-line performance in the future. 

Against competition
NetApp is plying its trade in a very competitive industry. One of its most potent rivals is VMware, which has a broad portfolio of solutions and clients. VMware boasts more than 40 million virtual machines in more than 500,000 enterprises. VMware's industry-leading vSphere Hypervisor is a potent product and one of the most complete offerings in software-defined networking.

PC giant Hewlett-Packard is one of the biggest players in the segment. The company's share of the storage market grew to 9.6% in the previous quarter, up from 8% in the year-ago period. Analysts at Barclays expect HP to gain further in this segment on the back of share gains in x86 servers and 3PAR storage gear. 

NetApp has been doing very well and the company's product innovation and complete solutions should help it continue its robust performance. Also, at a forward P/E ratio of 12.48, the stock is quite cheap, considering that earnings are expected to grow in the teens over the next five years. So, NetApp looks like a good investment to benefit from the growth of data.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends VMware. The Motley Fool owns shares of VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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