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NetApp (NTAP) Downgraded to Strong Sell: Time to Offload It?

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On May 28, 2016, Zacks Investment Research downgraded NetApp Inc. (NTAP - Free Report) to a Zacks Rank #5 (Strong Sell). Going by the Zacks model, companies holding a Zacks Rank #5 are likely to underperform the broader market.

Why the Downgrade?

On May 25, 2016, NetApp posted dismal results for the fiscal fourth quarter of 2016 wherein its top and bottom line numbers compared unfavourably with the year-ago quarter figures.

The company reported adjusted earnings per share of 36 cents and revenues of $1380 million, which missed the respective Zacks Consensus Estimate of 40 cents and $1411.7 million. On a year-over-year basis too, the metrics registered steep declines of 23.4% and 10.4%, respectively. Revenues were marred by an uncertain IT spending environment along with a drop in Product revenues.

NetApp also issued its outlook for the first quarter of fiscal 2017. The company expects revenues in the range of $1.20 billion to $1.35 billion. The Zacks Consensus Estimate is pegged at $1.350 billion. GAAP earnings per share are anticipated between 13 cents and 18 cents and non-GAAP earnings per share within 34 cents to 39 cents. The Zacks Consensus Estimate stands at 34 cents.

There have been frequent downward estimate revisions of late. In fact, the Zacks Consensus Estimate for the current quarter dropped 40% to 18 cents over the last 60 days. For fiscal 2017, five out of six estimates were lowered over the same time frame, lowering the Zacks Consensus Estimate by approximately 10.1% to $1.43.

Moreover, the stock looks very unattractive from a valuation perspective. This is because NetApp currently trades at a forward P/E of 15.99x as against the industry group average of 3.50x, which signifies a huge downward potential.

Furthermore, it is worth noting that out of the trailing four quarters, the company underperformed the Zacks Consensus Estimate in two, outperformed it once and  matched the same in the remaining quarter.

We believe that the recent forecast for worldwide IT spending by Gartner raises concerns about NetApp’s near-term performance. Competition from EMC Corp. (EMC - Free Report) and HP Inc. (HPQ - Free Report) add to the woes.

Stocks to Consider

Another stock worth considering in the technology sector is DST Systems Inc. , carrying a Zacks Rank #2 (Buy).

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