Strong Analyst Day Underscores Why NetApp Inc. Stock Is a Buy

Hybrid cloud data services provider NetApp Inc. (NASDAQ:NTAP) hosted its annual Analyst Day on April 5. The company raised its short- and long-term growth outlooks. They also added firepower to the capital returns program, adding $4 billion to the share buyback program and promising to double the dividend.

Investors and analysts alike applauded. Analysts upgraded NetApp stock. Investors bought NetApp stock.

Now, NTAP stock trades trades right around all-time highs despite the S&P 500 being 8% off recent highs.

Can this rally in NetApp stock continue?

I think so. NTAP is fundamentally transforming its business model to be not only relevant, but necessary, in today’s data-driven digital world. Growth prospects are consequently improving. Meanwhile, the stock remains cheap.

Overall, I think NetApp stock can rally to and above the $75 mark over the next several months. Here’s a deeper look.

Big Growth Narrative in Data

NTAP has successfully pivoted its business model from low-growth to improving-growth by focusing on providing solutions for companies immersed in secular data-driven digital transformations.

Across all industries, this data-driven digital transformation is happening en masse. It’s as if everyone is suddenly waking up and realizing not only how much more seamless, connected and convenient cloud architecture is, but also how powerful and insightful data can be. This realization is causing companies far and wide to not only jump on the cloud bandwagon, but also seek out services which allow them to collect, manage, store and analyze meaningful data.

This is where NetApp thrives. NetApp provides solutions that give companies the necessary tools to succeed in today’s data-driven digital world.

This is a big and growing market. NTAP estimates that its addressable market is $54 billion. Within that market, the cloud storage market is growing at a 13% clip, while hybrid cloud infrastructure market is growing at a 29% clip. NetApp dominates those two markets and, because of this, is positioned for healthy growth over the next several years.

NetApp Stock Is Fundamentally Undervalued

Despite a rising stock price, NetApp stock still isn’t appropriately priced considering its improving long-term growth prospects.

The data revolution is only just beginning, and the amount of data in the world is expected to continue exploding higher. As this revolution gains more and more traction, more and more companies will turn towards NetApp’s suite of solutions which help them succeed in the data-driven digital world.

Consequently, revenue growth won’t slow much over the next several years. Revenue growth is running around 6% right now.  It is expected to run around the mid-single digit range over the next 2 years. Over the next 5 years, I think revenue growth should run around 3-5%.

Margins are zooming higher thanks to higher-margin cloud sales. This transition should continue. Operating margins are expected to be 19% this year. They are expected to grow to 20-24% in 2 years. In a 5-year outlook, then, it is reasonable to assume continued cloud business ramp drives operating margins to 25%.

If revenues grow by 4% per year over the next 5 years (from this year’s projected $5.87 billion base) and operating margins rise to 25%, then you are looking at revenues of $7.14 billion and operating profits of $1.79 billion in 5 years. Taking out 19% for taxes and dividing by a significantly reduced share count of presumably 210 million, that equates to earnings per share of roughly $6.90.

A market-average 16 forward multiple on those $6.90 earnings implies a four-year forward price target of $110. Discounting that back by 10% per year, you arrive at a present value of roughly $75 for NetApp stock.

Bottom Line on NTAP Stock

NTAP stock has been a big winner this year and last year for a good reason. The company is thriving in the overlap of the cloud and data revolutions. Neither of these revolutions will slow down by much over the next several years, and as such, NTAP’s growth won’t slow down much, either.

NetApp stock still isn’t appropriately priced considering the company’s improving growth prospects. By my numbers, this stock still has another 15% upside until its fairly valued.

As of this writing, Luke Lango was long NTAP.

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