NetApp Inc. (NASDAQ:NTAP) stock rose 0.81% (As on April 11, 11:24:13 AM UTC-4, Source: Google Finance) after Matthew Sheerin of Stifel upgraded his rating from Hold to Buy while assigning a price target of $75 per share, which remained unchanged. Sheerin believes that NetApp is positioned to benefit from recent cost-cutting measures, lower component costs, and a re-organization of its sales team once the demand cycle bottoms out. In addition, the firm may receive a small boost in margins, given the recent decline in NAND prices.
The analyst comments that he hosted investor meetings with NetApp CFO Mike Berry and IR VP Kris Newton. The execs acknowledged that predicting when the current demand cycle bottoms continues to be difficult. But they also pointed to several company-specific initiatives/catalysts that should help boost margins and EPS in coming quarters, regardless of how macro plays out. Those include: 1) a recent 8% headcount reduction; 2) a planned sales force re-org aimed at aligning reps more closely with specific customers and vendors; 3) an expected margin tailwind from lower component costs due to improved supply; and 4) the recent introduction of QLC-based, lower-cost all-flash arrays (C-Series), which could help boost market share. The analyst has came away from the meetings more confident in the FY24 estimate — $5.49 — which reflects a soft 1H but a return to sales and EPS growth in 2H24. Therefore, the analyst has upgraded the rating to Buy and maintain our $75PT (19% upside).
Meanwhile, the company at the start of Q4, had implemented a workforce reduction of approximately 8%. The company’s hybrid flash and QLC-based all-flash arrays continue to perform well, benefiting from customers’ price sensitivity in this challenging macro. The shift from high-performance all-flash arrays to lower cost solutions, coupled with the lower spending environment, especially among large enterprise and US tech and service provider customers who are large consumers of flash, created headwinds to the product and all-flash array revenues.
In fiscal 2023, the company continues to expect gross margin to range between 66% and 67%, as elevated component costs and FX headwinds weigh on product margins. The company now expects op margin to range between 23% and 24%, which includes approximately 2 points of FX headwinds. The company reiterated the full year EPS guide of $5.30 to $5.50, which includes $0.54 of currency impacts. The company also continues to expect to generate $1.1 billion in free cash flow, excluding one-time items.