Technology is changing our world with digital transformation becoming the strategic agenda for most of the companies. The tech companies that provide services, software and hardware to manage and share data across clouds and on-premises are now gaining momentum as a result of the global pandemic. In this scenario, let’s see why holding the stock of hybrid cloud services provider NetApp (NASDAQ: NTAP) is a good decision.
The Sunnyvale, California-based firm’s revenue decreased 12% in the fiscal year ended April 24, 2020, compared to fiscal 2019. This was primarily due to a 20% decline in product revenues. Profit declined to $819 million from $1.17 billion in the prior year. Profit reduced 30% year-over-year to $819 million in FY20.
The decline in NetApp’s product revenue was primarily due to the unfavorable macroeconomic conditions and lower enterprise IT spending throughout fiscal 2020. Also, the increasing macroeconomic uncertainty caused by the global pandemic contributed to demand weakness in the final quarter of 2020, while associated logistical challenges led to interrupted deliveries of products and services to certain customers.
While the product revenue declined in FY20 due to the COVID-19 impact, you can see an increase in revenue from software maintenance as Cloud Data Services gained momentum.
Operating expenses for FY20 decreased slightly to $2.68 billion from $2.72 billion in the prior year. In an email communication to AlphaStreet, NetApp spokesperson reiterated that as of now the company has not decided to make any significant structural changes to its expense base until it gets better visibility into the duration and magnitude of the current downturn. The company added that the situation is expected to remain fluid over the next two to three quarters.
In the fiscal year ended April 24, 2020, NetApp acquired Cognigo Research, which deals with data discovery and next-generation software-defined storage solutions provider Talon Storage Solutions. At the end of April 2020, NetApp acquired Cloud Jumper, a provider of virtual desktop infrastructure and remote desktop services solutions. Early this month, the company acquired Spot, a provider of computing management and cost optimization services on the public clouds. These acquisitions bolster the company’s strategic roadmap, particularly within the Cloud Data Services business.
To beat the rivals, NetApp has been working continuously on new product releases like MAX Data and Project Astra. The company spokesperson said that Project Astra, the application data management software, is currently now in Alpha phase and general availability is planned for later in the year. NetApp competes against Dell Technologies (NYSE: DELL), Hewlett Packard Enterprise (NYSE: HPE), Hitachi Vantara, and International Business Machines (NYSE: IBM), as well as Pure Storage (NYSE: PSTG), Nutanix (NASDAQ: NTNX), and other smaller players.
The COVID-19 pandemic has negatively impacted NetApp’s business in many ways, resulting in:
- Reduced demand for the company’s products and services
- Delayed and deferred purchases
- Restriction of sales, marketing and distribution efforts
- Supply chain disruption
- Disruption of the suppliers, customers and partners
NetApp expects these disruptions to negatively impact its future sales and results of operations for an uncertain duration and with an unknown level of magnitude.
The company’s net revenue declined year-over-year in FY20, mainly because of the reduction in product revenue. However, rising software maintenance revenue is an encouraging sign. Once the critical situation ends, product revenue is also expected to increase for NetApp. As more and more companies opt for digital transformation, the Cloud Data Services business is expected to add more value to NetApp in the future.
More than 80% of the analysts covering NetApp recommends either to “Buy” or “Hold” the stock. After hitting a 52-week high ($65.38) in January this year, NTAP stock plunged to yearly low ($34.66) on March 23. With the growing strength in Cloud Data Services, market watchers expect NetApp stock to benefit long-term investors.
DISCLAIMER: This article does not necessarily imply the views of AlphaStreet, and contains opinions of the author alone.
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