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
.