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How NetApp Benefits from Cloud Demand
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.
Cloud Computing, also known as IT as a Service (ITaaS), is increasingly being adopted as a way for IT organizations to decrease costs, improve efficiency, and enhance business agility. We believe that NetApp is very well positioned to benefit from this surge in demand of Cloud Computing. We currently have a Trefis price estimate of $64 for NetApp's stock , about 22% above its current market price.
Transition to Cloud
IT budgets in most organizations have historically remained stubbornly flat, but demands on IT continue to rise year over year. Increasing requirements for business agility, reducing costs, and improving efficiencies has forced organizations to implement private clouds. Cloud Computing enables IT departments to overcome the short comings of traditional environments - built and optimized to run specific applications, delivering poor server and storage utilization (on average, 10-15% utilization for servers and 30-40% for storage).
Cloud computing derives its usefulness from virtualization. Once the IT infrastructure is virtualized, firms have the foundation of a shared IT infrastructure of pooled computer, network, and storage resources to delivery capacity on demand and meet fluctuations in resource requirements. The improved ability to scale infrastructure up or down to meet dynamically changing and new business needs increases business ability while shared IT infrastructure not only reduces hardware acquisition costs but also results in significant savings in IT staffing costs and data center space, power, and cooling. Increased efficiency results from the standardization, better resource allocation and utilization, simplified and automated provisioning processes, and overall operational efficiency improvements in the automation of all aspects of IT management.
In a recent IDC survey of IT decision makers, 44% of respondents indicated that they were considering implementing a private cloud-a cloud deployment contained within the corporate firewall to meet the needs of internal customers.
How NetApp Benefits
NetApp can benefit in multiple ways from demand for cloud services:
(1) Higher storage market share
NetApp has been helping companies evolve to a private cloud infrastructure since before the term cloud became popularized. NetApp private cloud solutions are based on its industry-leading data and storage management technology.
We believe NetApp's share in storage market will rise as firms adopting Cloud Computing will increasingly turn towards NetApp, one of the pioneers of the industry with proven products and expertise, in order to effect a massive change in their IT infrastructure that will help them remain competitive.
(2) Higher software licenses and demand for consulting services
In addition to witnessing increasing hardware sales, NetApp will see a surge in software license and maintenance as well as support and consulting services revenues, which are dependant on hardware sales, given the newness of the technology provided.
We estimate there could be a upside of 20% upside to the Trefis price estimate for NetApp's if its share in the storage market increases to 16% by 2017 as against our current estimate of 13%.