NetApp Has Better Storage Trends than Pure, Says Maxim – Barron’s

Maxim Groups Nehal Chokshi this morning raises his rating on storage technology vendor NetApp(NTAP) to Buy from Hold, while cutting his rating on shares of competitor Pure Storage (PSTG) to Hold, writing that the former is seeing success with its newer products for cloud computing, which can boost profit, while Pure is at risk of betting againstpublic cloudcomputing.

Chokshi raises his price target to $56 from $46 for NetApp, writing that it can achieve a 25% operating profit margin, in five years from now, up from 17% at the moment.

Its newer products for cloud, writes Chokshi, are giving NetApp newfound differentiation:

NTAP has developed a portfolio of hybrid cloud data management products that include NetApp Private Storage (released in late 2012), ONTAP Cloud (launched in late 2014), Altavault (acquired from FFIV in 2015), CloudSync and Cloud Control (both released in late 2016). These products form an effective complete hybrid cloud data management capability that spans mission critical workload bursting from a private to a public cloud (NPS) to the more basic disaster recovery (AltaVault) capability. On our annual Silicon Valley bus tour, CEO George Kurian reiterated from the Analyst Day that the company has 1,500 hybrid cloud customers (we estimate out of ~60K customers) that are utilizing NetApp Private Storage (NPS) and thousands of customers that are utilizing one of NTAP's hybrid cloud products with the customer base growing triple digits. Our limited channel checks also indicate that NTAP has begun to gain mindshare with resellers in terms of the company's hybrid cloud capabilities, which is providing a significant differentiator for NTAP that is aligned with the longer-termed trend of hybrid cloud adoption.

In addition to cutting costs, NetApp can boost its operating profit margin by raising its gross profit marginthanks to newer product:

We note that management has changed comp plans beginning in the July Q (F1Q18) to stop sales reps from over-specifying competitive deals to ensure winning deals at the expense of GM. We also note that when differentiation for NTAP was high, product GM was as high as 60% (FY06 to FY11, when NTAP benefitted from strong alignment with virtualization). Given evidence that NTAP's differentiation has morphed towards its rich and mature portfolio of hybrid cloud data management products which we believe will prove to be a decade long trend as virtualization had been, we see potential for NTAP to drive product GM back to the 60% level over time (vs. FY17 level of 47.4%). Plugging 60% product GM in would then yield an overall GM increase of 700bp.

As for Pure, whose price target Chokshi cuts to $15 from $20, he's got two concerns.

One is that the company is betting on corporate IT managers and therefore is in a sense betting against the spread of public cloud computing.

Pure is deeply invested in on-premise IT, writes Chokshi:

We note that the differentiating characteristics for PSTG continues to be to enable best-in-class on-premise IT data management capabilities, which makes PSTG a loved OEM with on-premise IT departments that naturally resist change. Given the pattern of PSTG's product development efforts consistently betting on IT departments resisting all other changes other than movement to data management simplicity and All Flash Arrays, we note that PSTG is also then betting against; (1) IT departments looking to simplify overall IT operations by utilizing the hypervisor as the substrate for automation, and (2) IT departments leveraging the benefits of public clouds while maintaining ownership of the IT (i.e. hybrid cloud).

Second, Chokshi thinks the companys newer FlashBlade product needs several more years to mature:

We note that the level of features that FlashBlade currently carries is still relatively limited, including missing the capability of Active Clusters that PSTG just introduced for their five year older product FlashArray, which in our view highlights that FlashBlade likely still has a multi-year path to becoming fully matured. We note that FY18 (Jan Q end) guidance embeds accelerating y/y revenue growth throughout the course of the fiscal year (from 31% y/y in the Apr Q to 34% y/y in the Jul Q to 37% y/y growth in the Oct Q to 44% y/y growth in the Jan Q), which is premised on FlashArray continuing to grow ~25% y/y and FlashBlade doubling y/y similar to how FlashArray doubled y/y at the same stage of it's lifecycle of what FlashBlade is at currently. Given our analysis that FlashBlade still has a long ways to mature, analytically we see risk to the guidance assumption that FlashBlade is continuing to increase at a 2x y/y rate, though we also note that our checks did not produce a "smoking gun either.

Shares of NetApp are up 54 cents, or 1%, at $42.03, in early trading, while shares of Pure are unchanged at $12.67.

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NetApp Has Better Storage Trends than Pure, Says Maxim - Barron's

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