NetApp Stock Falls On Soft Guidance

NetApp; When Great Isn’t Good Enough

The NetApp (NASDAQ:NTAP) story isn’t unique for the reporting cycle. A great company delivered good results and yet shares are down because of it. The problem isn’t about the results, far from, but about the market and its expectations. The pandemic sparked and accelerated a new tech boom, results far outpaced consensus in the 2nd and 3rd quarter of 2020, and the expectation for accelerating results in the 4th quarter was high. NetApp had a high bar to beat and the actual results didn’t provide enough wow factor to keep the market interested. The salient point here is that NetApp is a great company, results were good, and the outlook is positive. In our opinion, the post-release sell-off looks like a good time to start buying (or buy some more of) this stock.

“Looking ahead, we are uniquely positioned to address customers’ requirements for digital transformations as they deploy workloads in the cloud, as well as maintain and modernize on premises. We are confident in the strength of our position as customers continue to turn to NetApp to help them solve the challenge of managing data in the hybrid cloud as the recovery unfolds,” said George Kurian, chief executive officer.

NetApp Beats On Top And Bottom Line

NetApp had a good quarter but it is not one of the double-digit growth stories we’ve seen in other segments of the market, at least not yet. The $1.47 billion in revenue is accelerating from the Q3 period and beat the consensus by 280 basis points but is only up 5%. Revenue was driven by a 6% increase in billings that in turn was driven by strength in the Public Cloud Services segment. Public Cloud Services’ annualized run-rate increased by 186% from last year on high demand from most end-markets.

“We delivered another strong quarter with revenues at the top of our guidance range and operating margin and EPS above the high end of our expectations. We have sharpened our execution and Q3 fiscal year 2021 marks our third consecutive quarter of revenue and billings growth,” says CEO Kurian.

Moving down the report, the company experienced some margin pressure due to increased marketing, SG&A expense, and R&D. Even so, the bottom line results were also better than expected with adjusted and GAAP EPS both $0.09 better than the consensus target.

The company is expecting strength to continue on into the final quarter of the fiscal year but the guidance is a little soft. The $1.44 to $1.54 in net revenue brackets the $1.47 billion consensus estimate perfectly as does the $1.06 to $1.10 in adjusted EPS. Based on the 3Q results, trends within the industry, and NetApp’s tendency to beat consensus we expect to see results come in near or above the high end of these ranges.

NetApp Pays A Nice Dividend

NetApp is an attractive tech play for more reasons than one. Along with its position as a cloud-services provider and outlook for growth the company pays a healthy dividend with a yield well above the broad market average. The company declared the latest distribution with the Q3 report, the stock goes ex-dividend on April 8th for those that are interested. Regarding safety, the company is paying out about 50% of the consensus 2021 earnings, it has a fortress balance sheet and ample free cash flow. What debt is present is mitigated by the cash pile, more than enough to pay off all debts and leave about $1 billion left over, so there is no reason to fear a cut or distribution suspension. As for dividend growth, the company hasn’t increased the distribution for two years but there is a history of increases and aggressive ones at that.

The Technical Outlook: NetApp Pulls Back To Support

Shares of NetApp appeared ready to rocket higher just a day before the release but that did not come to pass. Shares are down more than 7.0% in the pre-market and in danger of falling further if support at the $64 level doesn’t hold up. A move below $64 could put NetApp into a downtrend but we don’t think that will happen. If price action is able to fall that far we expect bargain hunters and dividend investors will start buying and drive them back up.