Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Is NetApp Making Money?

The shift to work from home and the digital economy is not helping cloud-services provider NetApp Inc. (NASDAQ: NTAP).

In fact, NetApp’s revenue growth has shrunk for the last five quarters. Notably, Stockrow estimates NetApp’s revenue growth fell by 12% in the quarter ending on April 30, 2020. Plus, NetApp’s revenue growth fell by 10.17% in the quarter ending on January 31, 2020.

Moreover, NetApp’s quarterly revenues fell from $1.592 billion on  April 30, 2019 to $1.401 billion on April 30, 2020. In addition, NetApp’s quarterly gross profit fell from $1.026 billion to $946 million in the same period.

In contrast, NetApp’s operating income fell from $370 million on April 30, 2019 to $277 million on April 30, 2020. In the same year, the net common income fell from $396 million to $196 million.

Thus, NetApp is making less money than it was last year. In addition, NetApp’s revenues fell from $1.404 billion on January 31, 2020 to $1.401 billion three months later. Interestingly, NetApp’s quarterly gross profit stayed the same at $941 million on both dates.

How Much Cash does NetApp generate?

NetApp reported a quarterly operating cash flow of $383 million on April 30, 2020 down from $420 million on January 31, 2020. Additionally, NetApp reported that its investing cash flow fell from $111 million on January 31, 2020 to $42 million on April 30, 2020.

Conversely, I think NetApp’s business is burning cash because it reported a -$45 million negative cash flow on April 30, 2020. However, NetApp still had $2.822 billion in cash and short-term investments on April 30, 2020. That number was down from $3.008 billion on January 31, 2020.

Given these numbers, I think coronavirus is hurting NetApp’s business. I think NetApp’s business is falling because economic activity in the United States is collapsing.

In particular, The New York Times’ The Upshot estimates nominal economic output in the US fell by 5.3% in the first six months of 2020. Given that number, I think American companies are spending less money on services, including NetApp’s cloud.

What Value Does NetApp have?

NetApp (NASDAQ: NTAP) had total assets of $7.522 billion on April 30, 2020 and $7.483 million on 31 January 2020. Hence, the value of NetApp’s infrastructure has grown slightly.

Importantly, NetApp operates in a sector that could experience dramatic growth. The global cloud services market’s value could grow from $264.8 billion in 2019 to $927.51 billion in 2027, Valuates estimates. Thus Valuates claims the cloud services market could grow by over two-thirds over the next seven years.

The global cloud services market has a Compound Annual Growth Rate (CAGR) of 16.4%, Valuates claims. Hence, NetApp’s market could grow by 16.4% a year if Valuates is correct.

NetApp can capitalize on that growth with a package of services that include: hybrid cloud infrastructure, flash storage, data storage systems, data infrastructure management, data storage software, data protection and security products, and professional support services.

Is NetApp a Good Stock?

Consequently, Mr. Market could undervalue NetApp in a growing  market. I think Mr. Market undervalued NetApp at $44.08 a share on June 19, 2020.

NetApp’s share price has fallen in 2020. NetApp began the year at $62.77 on January 2, and fell to 2020 to $42.46 on June 12, 2020 and $43.18 on June 15, 2020 rose to $44.08 on 19 June 2020. Thus, NetApp’s share price could be collapsing. However, the cloud infrastructure business is still expanding.

Appealingly, NetApp pays an excellent dividend. The next quarterly NetApp dividend will be 48₵ on  July 29, 2020. NetApp pays a dividend and its value is growing.

Overall, each NetApp share offered an annualized dividend yield of 4.67%, an annual payout of $1.92 and a forward payout ratio of 47.41% on June 15, 2020. In addition, credits NetApp (NASDAQ: NTAP) with six years of dividend growth.

Does NetApp have a High Margin of Safety?

If you are looking for an obscure and undervalued tech company the media ignores, NetApp is worth a look. I think NetApp could be an excellent stock for ordinary investors because it pays a dividend and could have a high margin of safety.

I think NetApp’s margin of safety could be high because it operates in a fast-growing industry: cloud services. On the other hand, investors who want a high share price need to be leery of NetApp. To explain, I think NetApp’s share price could fall farther.

In conclusion, I think NetApp offers a nice dividend and strong growth potential. In today’s market I think that is an excellent combination for any investor.