Over the past six months, NetApp’s shares (currently trading at $98.71) have posted a disappointing 15.8% loss while the S&P 500 was flat. This was partly due to its softer quarterly results and might have investors contemplating their next move.

Is there a buying opportunity in NetApp, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think NetApp Will Underperform?

Even with the cheaper entry price, we're cautious about NetApp. Here are three reasons why we avoid NTAP and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, NetApp grew its sales at a tepid 3% compounded annual growth rate. This fell short of our benchmark for the business services sector.NetApp Quarterly Revenue

2. Billings Hit a Plateau

Billings is a non-GAAP metric that sheds light on NetApp’s demand characteristics. This metric is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period - different from reported revenue, which must be recognized in pieces over the length of a contract.

Over the last two years, NetApp failed to grow its billings, which came in at $1.71 billion in the latest quarter. This performance was underwhelming and shows the company faced challenges in acquiring and retaining customers. It also suggests it may need to improve its products, pricing, or go-to-market strategy.NetApp Billings

3. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect NetApp’s revenue to rise by 3.8%. While this projection indicates its newer products and services will fuel better top-line performance, it is still below average for the sector.

Final Judgment

NetApp doesn’t pass our quality test. Following the recent decline, the stock trades at 12.9× forward P/E (or $98.71 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.

Stocks We Like More Than NetApp

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Story Continues

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