What Investors Need To Watch With NetApp's Q3 Earnings

JasonDoiy

Elevator Pitch

My Buy standing for NetApp's (NASDAQ:NTAP) banal stays unchanged.

I noted that NetApp is an charismatic dividend play pinch my earlier article for NTAP written connected June 7, 2022. With nan latest write-up, I preview NetApp's upcoming net announcement for nan 3rd 4th of fiscal 2023 (YE April 30).

I find that nan chances of NTAP achieving a Q3 FY 2023 net hit are beautiful good. NetApp's existent valuations are undemanding based connected nan guardant P/E metric, and NTAP's banal value has room to emergence pinch a imaginable valuation aggregate description supported by above-expectations EPS.

Q3 FY 2023 Results Reporting Date For NTAP

NetApp antecedently issued a media release connected February 6, 2023, noting that nan company's Q3 FY 2023 net will beryllium disclosed connected February 22, 2023, aft trading hours. NTAP's 3rd 4th results briefing will beryllium held successful nan early day connected nan aforesaid time arsenic its net release.

NetApp's Q2 Earnings Review And Q3 Guidance

As portion of nan preview of NTAP's Q3 FY 2023 financial results, it is basal to reappraisal NetApp's Q2 FY 2023 financial capacity and nan company's forward-looking guidance guidance.

NetApp's Q2 FY 2023 results weren't arsenic bully arsenic what they seemed connected paper.

The company's non-GAAP adjusted net per stock aliases EPS grew by +16% YoY from $1.28 successful Q2 FY 2022 to $1.48 for Q2 FY 2023, and NTAP's 2nd 4th bottommost statement hit nan sell-side's statement normalized EPS estimate of $1.33 by +11%. However, NetApp's Q2 FY 2023 non-GAAP net included non-operating different income of astir $23 cardinal (or $0.11 per share). In different words, NTAP's 2nd 4th normalized EPS, excluding non-operating different income, will beryllium astir $1.37 which translates into a much humble +3% net beat.

Furthermore, nan YoY topline maturation for NTAP slowed from +11% for Q2 FY 2022 and +9% for Q1 FY 2023 to +6% successful Q2 FY 2023. NetApp's existent 2nd 4th gross of $1,663 cardinal hardly missed nan market's statement topline projection of $1.67 billion.

At nan company's Q2 FY 2023 net call connected November 29, 2022, NetApp specifically highlighted that nan anemic "IT superior spending environment, including nan attraction connected optimization of unreality spending" has been a cardinal headwind.

As portion of its Q2 FY 2023 results disclosure, NTAP besides revised its expectations for its full-year FY 2023 capacity and issued caller Q3 FY 2023 guidance. NetApp reduced nan mid-point of its fiscal 2023 topline maturation guidance from +7% to +3%, and nan institution besides trim nan mid-point of its FY 2023 normalized EPS guidance from $5.50 to $5.40.

The caller Q3 FY 2023 guidance guidance provided by NetApp was beneath expectations. Based connected nan mid-point of its financial guidance, NTAP is expected to registry gross of $1.6 cardinal and a normalized EPS of $1.30 for nan 3rd 4th of nan existent fiscal year. In contrast, nan statement Q3 FY 2023 topline and bottommost statement for NetApp anterior to its Q2 FY 2022 net merchandise were overmuch higher astatine $1.71 cardinal and $1.44, respectively.

NTAP's lackluster Q2 FY 2023 financial capacity and disappointing Q3 FY 2023 guidance are not needfully a bad thing, arsenic expectations for NetApp's near-term financial capacity are very debased arsenic outlined successful nan adjacent section.

The Market's Expectations Of NTAP's Third Quarter Performance

The sell-side analysts deliberation that NetApp's financial results and banal value capacity will beryllium mediocre successful nan short term, aft assessing NTAP's second-quarter results and third-quarter outlook.

The existent Wall Street statement Q3 FY 2023 gross and normalized EPS forecasts for NTAP are $1.62 cardinal and $1.31, respectively. The analysts' statement financial projections are mostly successful statement pinch nan company's guidance guidance and are balanced to QoQ declines of -3% and -11% for NetApp's topline and bottommost line, respectively. It is besides noteworthy that 20 of nan 23 Wall Street analysts covering NTAP's banal slashed their 3rd 4th EPS estimates for nan institution successful nan past 3 months.

In nan past 3 months, nan number of Strong Buy and Buy ratings for NetApp decreased from 13 to 10, and location was a caller Strong Sell standing awarded to NTAP successful this aforesaid period. Barclays (BCS), JPMorgan (JPM), and Morgan Stanley (MS) were among nan sell-side brokers which downgraded their respective finance ratings for NetApp successful caller times. NTAP's mean sell-side expert target value was besides lowered by -13% from $88.05 to $76.48, since nan institution reported Q2 FY 2023 earnings.

My Prediction Is A Q3 Earnings Beat For NetApp

I return nan position that NetApp will beryllium capable to present above-expectations normalized EPS for nan 3rd 4th of fiscal 2023 (November 1, 2022 to January 31, 2023 almanac year).

According to a January 23, 2023 investigation study (not publically available) issued by JPMorgan pinch nan title "Channel Talk: 1Q23 Dist./VAR Survey", existent IT spending for almanac twelvemonth Q4 2022 could person been amended than what nan marketplace expects. As per JPM's report, nan "25 distributors and VARs (Value-Added Resellers)" successful nan IT manufacture surveyed had recorded Q4 2022 (calendar year) income that were "tracking connected mean 1% supra plan."

Separately, my mentation of NetApp's guidance comments astatine caller investor events suggests that nan company's existent Q3 FY 2023 mightiness perchance meet aliases transcend marketplace expectations. At nan UBS (UBS) Global TMT Conference connected December 5, 2022, NTAP noted that nan company's 2H FY 2023 capacity frankincense acold was accordant pinch "the macro" and "the customer conversations that we're having." NetApp besides mentioned astatine nan Barclays Global TMT Conference connected December 6, 2022 that "we wanted to beryllium prudent successful position of our 2nd half (2H FY 2023)", moreover though "we still consciousness really bully astir nan products."

In a nutshell, nan marketplace doesn't person sky-high expectations relating to NTAP's Q3 FY 2023 results, and insights from a caller supplier study and nan company's information successful investor conferences bespeak that NetApp could perchance execute an net hit for nan 3rd quarter.

Concluding Thoughts

NetApp remains a Buy-rated banal successful my opinion. NetApp's statement guardant adjacent 12 months' normalized P/E has already derated importantly from a three-year highest of 18.8 times recorded successful September 2021 to 12.5 times arsenic per S&P Capital IQ data. I judge that location is simply a decent chance of NetApp reporting higher than expected net for Q3, and this mightiness beryllium what is needed to re-rate NTAP's valuations and push its stock value up.