Analyst: NetApp Should Acquire Someone Or Get Acquired

In a report published Monday, WR Hambrecht analysts maintained a Buy rating on NetApp, Inc (NASDAQ: NTAP), with a price target of $45, after attending the Data Storage Innovation conference last week.

The analysts believe that NetApp's core branded business is undergoing "a rapid change." The business is being disrupted by secular storage trends, namely, Hybrid Storage Arrays, Flash, Hyper-Converged Infrastructure and Cloud. The disruption appears to be accelerating.

In the report WR Hambrecht noted, "While NetApp's WAFL-based operating system was considered one of the best in the industry, we expect the company to underperform its peers in the near term, given the more efficient storage systems in the market today. With NetApp's lackluster revenue growth (beginning in the US), it is not surprising that the company is looking to retrench a large percentage of its workforce (reports indicate as high as 30%) just to keep up with earnings forecasts."

The analysts believe that the company's strategy of tweaking WAFL and ONTAP to secular trends is not working, and management needs to address the secular trends by taking a fresh approach. "We think the company should take a page out of the EMC (NYSE: EMC) (rated as Buy) playbook and acquire a cutting-edge new era storage product or put itself up for sale."

The analysts identify Cisco Systems, Inc (NASDAQ: CSCO) as the best suitor for NetApp. The acquisition of NetApp and another storage vendor such as Nimble Storage, Inc (NASDAQ: NMBL) (rated as Buy) would enable Cisco to compete effectively in the storage business.

Although the stock appears cheap, some investors consider it as a "value trap," the report mentioned.