NetApp, Inc. (NTAP) in Sunnyvale, Calif., and Pure Storage, Inc. (PSTG) in Mountain View, Calif., are two prominent players in the computer hardware industry. NTAP offers storage solutions and cloud services to manage and share data on-premises and in private and public clouds worldwide. Its storage solutions include specialized hardware, software, and services that provide storage management for open network environments. PSTG, in comparison, provides technology and data storage solutions and offers container data services, such as storage, data protection, data security, and disaster recovery/backup for cloud-native applications. It also offers flash enterprise arrays for high-performance workloads.
In-part because the resurgence of COVID-19 cases is causing delays in office-reopening plans, the computer hardware industry is witnessing massive demand for its products and solutions as enterprises strengthen their remote working models. Furthermore, the ongoing digital transformation in most industries is increasing the need for efficient storage solutions. These factors should boost the computer hardware industry’s growth in the near term. Moreover, the global computer hardware market is expected to grow at a 6% CAGR to $1.18 trillion by 2025. So, both PSTG and NTAP should benefit.
While PSTG’s shares have gained 10.5% in price over the past six months, NTAP has surged 42.1%. NTAP is a clear winner with 66.8% price gains versus PSTG’s 41.4% returns in terms of their past nine months’ performance. But which of these stocks is a better pick now? Let’s find out.
On June 22, 2021, NTAP acquired Data Mechanics, a managed platform provider for big data processing and cloud analytics, to help businesses capitalize on Apache Spark, an open-source unified analytics engine for large-scale data processing and machine learning, in Kubernetes. As on-premises and cloud enterprise data and application growth are exploding, the use of analytics and machine learning to identify operating efficiencies, cost reductions, and automate manual processes should enable NTAP to expand its market reach in the coming months.
On August 31, 2021, Olympus Corporation, a Japanese manufacturer of optics and reprography products, selected PSTG’s AIRI reference architecture for AI (artificial intelligence), to contribute to the rapid provision of AI development for the company. PSTG’s AIRI and NVIDIA Corporation’s (NVDA) NVIDIA DGX-1 Systems give Olympus the speed, scalability, and flexibility it needs to develop and deploy high-performance, data-intensive applications continuously.
Recent Financial Results
NTAP’s net revenues for its fiscal first quarter, ended July 30, 2021, increased 11.9% year-over-year to $1.46 billion. The company’s non-GAAP gross profit came in at $1.01 billion, up 14% from the prior-year period. Its non-GAAP income from operations increased 57.8% year-over-year to $336 million. While its non-GAAP net income increased 61.3% year-over-year to $263 million, its non-GAAP EPS increased 57.5% to $1.15. As of July 30, 2021, the company had $4.55 billion in cash, cash equivalents, and investments.
For its fiscal second quarter, ended August 1, 2021, PSTG’s total revenue increased 23.1% year-over-year to $496.83 million. The company’s non-GAAP gross profit came in at $350.08 million, up 24.2% from the prior-year period. PSTG’s non-GAAP operating income was $46.58 million for the quarter, representing a 316.3% year-over-year rise. Its non-GAAP net income was $43 million, up 145.3% from the prior-year period. Its adjusted non-GAAP net income increased 133.3% year-over-year to $0.14. The company had $340.25 million in cash and cash equivalents as of June 30, 2021.
Past and Expected Financial Performance
NTAP’s levered free cash flow has grown at a 9.5% CAGR over the past three years. Analysts expect NTAP’s EPS to increase 15.2% year-over-year in the current quarter, ending October 31, 2021, 23% in the current year, and 8.6% next year. Its revenue is expected to grow 9.1% year-over-year in the current quarter, 8.9% in the current year, and 5.3% next year. The stock’s EPS is expected to grow at a 12% rate over the next five years.
In comparison, PSTG’s levered free cash has grown at a 61.6% CAGR over the past three years. PSTG’s EPS is expected to increase 1141.5% year-over-year in the current quarter, 155.7% in the current year, and 31.2% next year. Its revenue is expected to grow 29.3% year-over-year in the current quarter, 21.3% in the current year, and 16.2% next year. Analysts expect the stock’s EPS to increase at a 55.4% CAGR over the next five years.
NTAP’s trailing-12-month revenue is almost 3.2 times what PSTG generates. NTAP is also more profitable, with a 20.8% EBITDA margin versus PSTG’s negative returns.
Also, NTAP’s ROE, ROA, and ROTC values of 170.3%, 7.6%, and 203%, respectively, compare favorably with PSTG’s respective negative values.
In terms of non-GAAP forward P/E, PSTG is currently trading at 56.12x, which is 214.9% higher than NTAP’s 17.82x.
In terms of trailing-12-month EV/Sales, PSTG’s 3.36x is 17.5% higher than NTAP’s 2.86x.
While PSTG has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, NTAP has an overall B grade, equating to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.
Both PSTG and NTAP have a C grade for Momentum, in sync with their mixed price performance.
Both the stocks have a C grade for Stability, which is consistent with their slightly higher volatility compared to the broader market. In addition, NTAP has a 1.29 beta, while PSTG’s beta is 1.38.
Of the three stocks in the A-rated Technology – Storage industry, PSTG is ranked #3, while NTAP is ranked #2.
Beyond what we’ve stated above, our POWR Ratings system has also rated NTAP and PSTG for Growth, Value, Sentiment, and Quality. Get all PSTG ratings here. Also, click here to see the additional POWR Ratings for NTAP.
While both NTAP and PSTG should benefit from the industry tailwinds, we think higher profitability, lower valuation, and better financials make NTAP a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Technology – Storage industry.
NTAP shares were unchanged in after-hours trading Wednesday. Year-to-date, NTAP has gained 37.57%, versus a 21.63% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More…
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