NetApp Stock Upside / Downside Scenario in Storage Hardware Business

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NetApp ( NTAP ) creates innovative storage and data management solutions for small and medium-sized companies around the world. It competes mainly with EMC ( EMC ), IBM ( IBM ), HP ( HPQ ) and Dell ( DELL ) in the external disk storage systems market and currently has just under 12% market share in the total external storage market in the world.

We estimate that NetApp's Storage Hardware business accounts for nearly 41% of the $64.48 Trefis price estimate for NetApp's stock , which is about 18% above the current market price.

Below we look at potential upside and downside scenarios for NetApp given shifts in two important components of its value - storage hardware market share and storage hardware gross margin.

(+40%) Upside - Gain in Storage Hardware Market Share

NetApp's share in the external storage market has historically grown at an average rate 1% annually over the last 5 years, increasing from 6.5% in 2005 to 11.5% in 2010.

Going forward, we expect NetApp to continue gaining storage market share as increased adoption of cloud leads to higher demand for virtualized storage infrastructure. According to 451 Group research, cloud-based storage accounted for nearly 40% of the $1 billion core cloud infrastructure spending in 2010 - a market expected to quadruple in size over the next three years - making cloud storage market worth $1.6 billion by 2013.

NetApp is making significant efforts to expand its share in the cloud storage. The firm recently acquired Akorri Networks, a virtualization software company that extends NetApps ability to provide customers with comprehensive tools to automate and analyze their shared IT infrastructures, efficiently deliver on service levels, and respond to rapidly changing business needs. (See NetApp Targets Virtualization With Akorri Acquisition Adding 20% Upside Potential )

Recently, NetApp also teamed up with Citrix (already the leader in desktop virtualization) and Cisco in offering a new desktop virtualization package, where its virtual storage offering will be utilized. Since the desktop virtualization has witnessed increased adoption in 2010 and is expected to grow rapidly in the future, we expect it to drive the demand for cloud storage boosting NetApp's share in cloud storage. (See IBM Enters Desktop Virtualization )

We believe, these factors coupled with the fact that NetApp is one of the pioneers in virtualization will help it gain storage market share as more organizations turn to virtualized infrastructure as the preferred way of delivering and running applications going forward. You can read further on the NetApp's offerings here - (NetApp Could Hit $90 on Growth in Hardware Storage Business)

We expect NetApp's share of the global external storage market to increase from 11.5% in 2010 to 13% by the end of our forecast period. However, there could be an upside of 40% to the Trefis price estimate if NetApp's market share were to increase at the historical rate of 1% annually, reaching 18.5% by the end our forecast period.

(-20%) Downside - Fall in Storage Hardware Gross Margin

In recent years, NetApp's Storage Hardware division's gross margin have risen significantly as a result of lower material costs, warranty costs and demonstration equipment reserves due to higher than anticipated sales of such equipments to the customers.

We forecast NetApp's gross margin for the Storage Hardware division to remain flat at 56% during the Trefis forecast period. There could be 20% downside to the Trefis price estimate for NetApp's stock if the margins decrease gradually going forward to 2005 levels of about 48%.The factors that could lead to this decline include - (i) increase in material and warranty costs and (ii) lowering of prices to promote adoption as well as to survive increased competition from major players like HP & Dell who are entering the cloud storage market in a big way. (See HP Emerges as Victor over Dell in Battle for 3Par) (See Dells Strategic Shift to Cloud Lifts Stock Outlook)

Drag the trend line in the chart above to see the impact of various storage share and storage hardware gross margin scenarios on NetApp's stock value.

Our complete analysis of NetApp's stock is here .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: DELL , EMC , HPQ , IBM , NTAP

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