Shares of storage solutions provider NetApp Inc. (NTAP) jumped more than 10% in the past five sessions due to the M&A talk surrounding its competitor EMC Corporation (EMC) and Dell.
Those talks materialized on Monday morning after Dell agreed to purchase EMC at a deal value of roughly $67 billion … so, what does this tie-up mean for NetApp stock?
Why NTAP Is Trading Higher
EMC and NetApp compete in the storage market, with both companies selling a wide range of storage products. Both companies are well penetrated in the server, enterprise storage market, backup/recovery disks and all flash markets, among other forms of storage.
Some research firms like Longbow have suggested that NTAP now becomes a more attractive acquisition target, potentially by Cisco (CSCO), or could gain market share in several storage markets while Dell and EMC remove duplicate product lines and integrate their large businesses.
While the suggestion makes sense, the key takeaway is that Dell’s acquisition of EMC does not appear to negatively impact NTAP. So at the very least, the merger has little impact on NTAP.
Why NTAP is a buy
Even if NTAP does not get acquired following the EMC purchase, or gain additional market share in key storage businesses by default, NetApp stock was still deserving of its 10% gains the last five sessions and is still a great investment opportunity.
The reason is because NetApp stock is cheap, and because new management is making all the necessary moves to create shareholder value.
During NTAP’s last quarter, its total revenue declined a whopping 10%. Yes, that doesn’t look good, but NTAP — already at $6 billion in annual revenue — doesn’t pretend to be a growth company. However, it is a cash cow with free cash flow of more than $1 billion the last four quarters. Not to mention, NTAP’s free cash flow is only going to rise as new management continues to cut costs, already reducing headcount by 1,500.
What NTAP does with all its free cash flow, and the $5 billion it has on its balance sheet, is pay a 2% dividend yield and buy back stock with authority. During its last quarter, NTAP spent $430 million on buybacks, well above the $246 million it had spent in the quarter before that.
Therefore, it appears that new management’s strategy is to maximize profits in NTAP’s core business and reduce the share count, which will drive NetApp stock higher.
With NTAP trading at less than 5 times free cash flow minus cash and equivalents, it doesn’t need rapid revenue growth to create significant shareholder value and to trade much higher.
Fact of the matter is that NTAP is a very cheap stock and good investment regardless of whether it is acquired.
The Wild Card for NTAP
All things considered, NTAP has investment value as is, but there are two wildcards that could be a big piece of the NTAP story five years from now. That is its Cloud OnTap platform and its All Flash FAS businesses.
Cloud OnTap manages both on-premise and cloud storage products. During NTAP’s last quarter, OnTap saw 114% shipment growth — its 13th consecutive quarter of triple-digit growth. This is a product that works in tandem with other NTAP storage products, giving customers a management solution. Thus, it has the potential to drive interest in NTAP products for customers that operate both on-premise and cloud-delivered IT.
NTAP’s All Flash FAS product is a flash storage technology with 20x the performance of traditional hard disk drive systems. What makes FAS special — at least according to NetApp — is that NTAP built it from the ground up for complete integration with its existing products. Since competitors, like EMC, built their flash technology through acquisitions they can not offer the complete volume and data management capabilities with application integration features of FAS.
With just one year on the market, FAS continues to grow rapidly quarter-to-quarter, including a 137% increase in NetApp’s last quarter.
NTAP does have behind-the-scene growth opportunities that could play a big role in the company’s future. This along with NetApp’s valuation and upside is yet one more reason to own NetApp stock — reasons that don’t include EMC or Dell.
As of this writing, Brian Nichols was long NTAP.
