Data storage company NetApp (NASDAQ: NTAP ) has struggled so far this year due to ongoing expense concerns as it competes against peer EMC (NYSE: EMC ) and a lagging equipment manufacturing, or OEM, business thanks to International Business Machines (NYSE: IBM ) . However, looking at recent data from IDC, combined with headlines from NetApp's analyst day, should investors be confident that a turnaround is in store?
What's been the problem?
EMC and NetApp are No. 1 and No. 2, respectively, in the large disk storage space. This industry has been under pressure in recent quarters, thanks to rising demand for cloud storage that runs on hardware, and the fact that cloud services have grown quite cheap.
As a result, both EMC and NetApp shares have underperformed the market over the last year. However, EMC has performed better, due to stronger exposure in the external disk storage space, which has outperformed internal storage.
Also weighing on NetApp shares are enormous year-over-year losses to its OEM segment, which accounts for 7% of total revenue. IBM was NetApp's largest OEM customer, but the former decided to focus on its own hardware and rebuild a segment that has lost revenue at a 20%-plus clip in recent quarters. As a result, NetApp's OEM segment has seen significant losses, including 34% in its most recent quarter.
Are things looking up?
While NetApp shares trade near 52-week lows, there have been recent headlines that imply the company is seeing improvements. On June 6, IDC estimated that worldwide external disk storage systems revenue declined 5.2% to $5.6 billion in the last quarter. Incorporating internal storage, the total market saw a 6.9% decline to $7.3 billion.
Albeit, with a market seeing such declines, investors should anticipate year-over-year revenue losses, but the important question is if a particular company's revenue declines surpass, or lag, those of the overall market. EMC's total market share fell 50 basis points from 22.9% to 22.4%. IBM, which has had problems in this arena, saw its market share fall a whopping 180 basis points to 15.1%.
Meanwhile, NetApp's total share actually rose 50 basis points to 11.7%. Clearly, the disconnect between IBM and EMC's losses to NetApp's growth is a positive for investors of the latter company.
Analysts Day suggests growth
Considering the company's analyst day, there might be reason to believe that strong performance is sustainable. Specifically, NetApp's branded revenue, excluding OEM, accounts for 93% of total sales, and the company expects mid-single-digit growth from 2015-2017. This signals stability in the internal or external storage industry, or expectations for additional market share gains.
During this three-year period, NetApp also believes that its operating margin will fall between 18%-20% (in 2013, NetApp's operating margin was 18%), implying that the company doesn't plan to grow by discounting. Moreover, NetApp actually forecasted EPS growth of around 10% for the current year, adding to the notion that product discounting won't drive growth.
What creates the growth?
With all things considered, NetApp either sees a recovery or stabilization in the internal and external storage market, or continued market share gains. This fact should make investors feel confident in looking at the stock long-term. While it, and EMC, appear very similar, one factor in NetApp's favor is that it lacks exposure to the high-end segment of the market, which has fallen fast.
Also, NetApp might be pricing in high expectations for its all-flash storage array, FlashRay, which has twice the performance of traditional flash storage for a 10%-20% increase in price. FlashRay is intended to combat the rise of hybrid flash products, which could lead to accelerate growth for NetApp.
Albeit, NetApp trades at just 11 times next year's earnings and pays a near-2% dividend yield, which should rise in 2015. The company also has another $1.1 billion in its buyback program, which it pledged to spend over the next 12 months. Given NetApp's stock losses, recent commentary, and forward-looking guidance, NetApp might just be a solid long-term value opportunity.
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