Shares of NetApp Inc. NTAP plunged to a new 52-week low of $28.30 on Dec 14 and eventually closed at $28.67, representing a year-to-date decline of 30.8%. Average volume of shares traded over the last three months was more than 3,279k.
Why the Plunge?
The decline was primarily due to a year-over-year drop in NetApp’s second quarter fiscal 2016 revenues. The company’s revenues decreased 6.4% year over year to $1.445 billion owing to unfavorable foreign exchange rates. Also, uncertain IT spending environment along with a drop in Product revenues impacted the quarter’s revenues.
Also, adjusted gross margin (including stock-based compensation but excluding amortization and other one-time items) contracted 250 basis points (bps) from the year-ago quarter to 62.1%. The decrease was primarily due to lower product gross margin. Also, a lower revenue base and foreign currency headwinds negatively impacted the gross margin.
The company also provided a not-so-encouraging revenue outlook for the forthcoming quarter. For the third-quarter of fiscal 2016, NetApp expects revenues in the range of $1.40 to $1.50 billion (mid-point $1.45 billion). The Zacks Consensus Estimate is pegged at $1.450 billion.
Moreover, from a valuation perspective, the stock looks unattractive as it currently trades significantly higher than the industry average based on a forward earnings estimate. This signifies a huge downward potential. NetApp currently trades at a forward P/E of 17.81x as against the industry group average of 1.90x.
Going forward, we believe that an uncertain IT spending outlook and competition from EMC Corp. EMC and HP Inc. HPQ remain headwinds.
It is worth mentioning that NetApp is heavily dependent on sales through indirect channels, value-added resellers, systems integrators, distributors, OEMs and strategic business partners, which account for approximately 80% of revenues. Among these, sale through distributors Arrow Electronics, Inc. and Avnet, Inc. account for roughly 23% and 16%, respectively, of fiscal 2015 revenues. Thus, loss of any key customer, reseller or distributor could affect the company’s overall results.
Stock to Consider
A better ranked stock is VASCO Data Security International Inc. VDSI, sporting a Zacks Rank #1 (Strong Buy).
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