NetApp Growth Underperforms, Morgan Stanley Remains Cautious

While the market is cheering the solid results and upbeat guidance from NetApp Inc. (NASDAQ: NTAP), Morgan Stanley is concerned about the company’s strategic product revenue growth and maintains its Underweight rating on the stock.

Justification For Bearish Stance

The brokerage pointed out NetApp’s strategic product revenue only grew 1 percent versus 21 percent growth in the prior four quarters, despite adding SolidFire to the portfolio earlier this year.

“With Mature product revenue still shrinking (-29 percent WY in Oct) and likely to stabilize at lower levels, we see a return to sustainable product revenue growth as unlikely,” analyst Katy Huberty wrote in a note.

Further, Huberty’s checks from resellers and CIOs suggest NetApp isn't positioned to rebuild share longer term, while cost cutting is not a sustainable strategy.

It's Not All Negative

On the positive side, the analyst said NetApp would benefit from customer uncertainty during Dell/EMC integration till early next year.

Given expectations of further cost cutting, the analyst raised FY 2017 EPS estimate to $2.60 from $2.41, and price target to $26 from $24.

At last check, shares of NetApp rose 7 percent to $37.20.