Is NetApp Stock a Buy Now?

NetApp (NTAP 0.78%) posted its first-quarter earnings report on Aug. 24. The data storage and cloud services company's revenue rose 9% year over year (13% in constant currency terms) to $1.59 billion, beating analysts' estimates by $40 million. Its adjusted net income grew 2% to $269 million, or $1.20 per share, which also topped the consensus forecast by a dime.

NetApp's growth rates look steady, and its stock only trades at 14 times forward earnings while paying an attractive forward dividend yield of 2.7%. That low valuation and high yield arguably put NetApp in the same league as resilient blue chip tech stocks like Cisco and Oracle. So, should investors buy NetApp as a defensive play today?

Image source: Getty Images.

What does NetApp do?

NetApp's data storage products and cloud-based services help companies automate tasks, manage content, and analyze data across the hybrid and public clouds. The ongoing migration of data from on-site servers to those cloud-based services has driven most of NetApp's recent growth.

Starting in fiscal 2022 (which started last May), NetApp restructured its business into two segments: the hybrid cloud unit, which helps companies integrate their private clouds into hybrid cloud services with data storage and management tools; and the public cloud unit, which provides storage, automation, optimization, and monitoring tools as cloud-based services. Here's how those two business segments fared over the past year.

Data source: NetApp. Chart by author. YOY = year over year.

NetApp's growth is decelerating, and it expects that slowdown to continue with 2%-11% revenue growth in the second quarter and 6%-8% revenue growth for the full year.

The hybrid cloud segment's gross margin also dipped year over year in the first quarter, mainly due to supply chain constraints and higher component costs. However, it expects that pressure to ease throughout the rest of the year. Its public cloud segment held up better since it's better insulated from the supply chain headwinds, and it still expects its gross margins to reach 75%-80% over the long term.

Data source: NetApp. Chart by author. YOY = year over year.

NetApp expects its gross margins to stabilize as the supply constraints ease. It expects its adjusted earnings per share to grow 0%-8% year over year in the second quarter and to rise 2%-6% for the full year.

Slowing hardware growth, accelerating software growth

On the hardware front, most of NetApp's growth is driven by its all-flash array (AFA) -- a data storage system that only uses flash-based, solid-state drives (SSDs) instead of older platter-based hard disk drives (HDDs). Its AFA business ended the first quarter of 2023 with an annualized net revenue run rate (ARR) of $3.0 billion, representing 7% year-over-year growth and accounting for nearly half of its trailing-12-month revenues. However, that momentum has been fading over the past year.

Data source: NetApp. Chart by author. YOY = year over year. AFA = all-flash array. ARR = annualized net revenue run rate.

NetApp blames that slowdown on supply chain constraints and currency headwinds. The macro headwinds also prompted some customers to buy its cheaper hybrid flash solutions instead of its pricier all-flash arrays.

NetApp's software growth has been driven mainly by its public cloud services, which it's been expanding through acquisitions. That smaller business is growing at a more stable rate than its AFA business.

Data source: NetApp. YOY = year over year. ARR = annualized net revenue run rate.

If we exclude NetApp's recent acquisition of Instaclustr in late May, its public cloud ARR would still have risen about 63% year over year. That's an impressive organic growth rate. And it expects its public cloud growth to continue accelerating and reach $780-$820 million by the end of fiscal 2023.

Stable growth with predictable shareholder returns

NetApp faces some near-term headwinds, but it rewards its patient investors with big buybacks and dividends. It reduced its outstanding shares by nearly 38% over the past 10 years, and it's paid continuous dividends for the past nine years. Reinvesting those dividends would have given you a total return of nearly 170% over the past decade. That's comparable to Oracle's total return of 170% but a bit lower than Cisco's total return of nearly 230%.  

NetApp isn't an exciting investment, but its low valuation, high yield, and stable growth rates should make it a safe stock to buy as rising interest rates continue to crush higher-growth tech stocks.