NetApp Inc (NTAP)

Conclusion

NetApp sells enterprise data management software, storage systems and cloud storage services across its Hybrid Cloud and Public Cloud segments. At 176.07 USD per share, the market capitalisation is 34.6 billion USD, with an enterprise value of 33.5 billion USD.

The verdict is overvalued. The fair value band runs from 82.24 to 123.36 USD, with a midpoint of 102.80 USD, which gives a margin of safety of -41.6% at the current price. The P/E of 24.4x compares with a ten-year median of 19.6x, and EV/EBITDA of 15.6x with 11.8x. The DCF gives 70.25 USD per share at a discount rate of 12.5%, and the fair value from historical multiples is 135.35 USD. The reverse DCF implies growth of 16.9% a year, while revenue grew 3.8% a year over five years and EPS grew 14.7%.

Three numbers support the case: ROIC of 335.9% against a WACC of 11.9%, free cash flow conversion of 116.4% on a trailing basis, and net debt to EBITDA of -0.49, which means net cash. Three numbers weaken it: the price-to-sales ratio of 4.7x against a ten-year median of 2.9x, revenue growth of 2.9% over three years, and stock-based compensation of 5.4% of revenue.

Financial health

Financial strength is green, with all four measures assessed good. The company holds net cash, with net debt to EBITDA of -0.49 on a trailing basis and interest coverage of 18.0x. The current ratio is 1.24 and the quick ratio 0.99, while debt to equity stands at 1.70. The Altman Z-score is 3.61, in the safe zone, although the model was designed for manufacturers and NetApp is not one. Insolvency risk: low, about 2.8% by the estimate of the Ohlson model over one to two years.

Earnings quality

Earnings quality is green, with all four measures assessed good. Free cash flow conversion is 116.4% on a trailing basis and 116.5% over five years, and the accrual ratio is -0.0734. Stock-based compensation is 5.4% of revenue, leaving free cash flow after it at 1.253 billion USD. The share count fell at a compound rate of 2.5% over five years, consistent with buybacks. The Piotroski score is 8 out of 9, and the Beneish M-score of -2.745 points to a reading of unlikely manipulation. The company beat estimates in seven of its last eight quarters, with an average surprise of 5.8%. Current-year EPS estimates rose 12.5% over 90 days, with 18 upward revisions and none downward in the last 30 days, and next-year estimates rose 13.6% over 90 days.

Profitability

Profitability is green, with all four measures assessed good. The gross margin is 70.6% against a ten-year median of 66.6%, the operating margin 25.7% against 18.7%, and the net margin 19.2% against 15.4%. ROIC is 335.9% against a WACC of 11.9%, which gives a ROIC minus WACC value of 324.0%. The five-year median ROIC is 177.6%. Return on equity of 94.9% is inflated by leverage. The DuPont split shows a net margin of 18.4%, an asset turnover of 0.64 and an equity multiplier of 7.95, so most of the equity return comes from the balance sheet structure rather than from margins alone.

Growth

Growth is green, with three measures good and one neutral. Revenue compounded at 2.9% over three years, 3.8% over five years and 2.3% over ten years. EPS compounded at 3.5% over three years, 14.7% over five years and 23.6% over ten years. Free cash flow per share compounded at 33.5% over three years, 12.6% over five years and 13.1% over ten years. Revenue grew in 7 of 10 comparable years. Next-year EPS growth is estimated at 11.5%. The revenue record is modest, and the earnings record is carried by margins and buybacks.

Valuation

Valuation is red, with the verdict assessed as bad. The P/E of 24.4x is a 24.2% premium to its ten-year median of 19.6x, EV/EBITDA of 15.6x a 32.1% premium to 11.8x, and price to free cash flow of 21.0x a 30.1% premium to 16.1x. The price-to-sales ratio of 4.7x is a 62.7% premium to 2.9x, and price to book of 23.1x a 14.2% premium to 20.3x. The DCF gives 70.25 USD per share at a discount rate of 12.5%, with terminal value making up 40.4% of it. The fair value band runs from 82.24 to 123.36 USD, with a midpoint of 102.80 USD and a margin of safety of -41.6% at 176.07 USD. The reverse DCF implies growth of 16.9%. This fair value is an order of magnitude built on fixed assumptions, including a 5% equity risk premium and capped growth, and is not a price target. The dividend yield is 1.2% and the payout on free cash flow 24.9%.

Risks

The main risk is the growth the price requires. The reverse DCF implies 16.9% a year, against revenue growth of 2.9% over three years and 3.8% over five. If revenue stays near its recent pace, the premium multiples have little support. A slowdown in buybacks would make the 5.4% stock-based compensation burden more visible in per-share results. The DCF rests on the terminal value for 40.4% of its figure, so small changes in the assumptions move the result. The analysis does not include a debt maturity schedule or revenue by segment, and the Altman model does not fit a company of this type.