– By GF Value
The stock of NetApp (NAS:NTAP, 30-year Financials) is believed to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $73.67 per share and the market cap of $16.4 billion, NetApp stock gives every indication of being modestly overvalued. GF Value for NetApp is shown in the chart below.
Because NetApp is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 5.9% over the past three years and is estimated to grow 0.37% annually over the next three to five years.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company’s financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company’s financial strength. NetApp has a cash-to-debt ratio of 1.41, which ranks in the middle range of the companies in Hardware industry. Based on this, GuruFocus ranks NetApp’s financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of NetApp over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. NetApp has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $5.6 billion and earnings of $2.64 a share. Its operating margin is 16.26%, which ranks better than 88% of the companies in Hardware industry. Overall, the profitability of NetApp is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of NetApp over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company’s stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of NetApp is 5.9%, which ranks in the middle range of the companies in Hardware industry. The 3-year average EBITDA growth rate is 16.9%, which ranks better than 68% of the companies in Hardware industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, NetApp’s return on invested capital is 11.06, and its cost of capital is 8.58. The historical ROIC vs WACC comparison of NetApp is shown below:
In summary, The stock of NetApp (NAS:NTAP, 30-year Financials) is believed to be modestly overvalued. The company’s financial condition is fair and its profitability is strong. Its growth ranks better than 68% of the companies in Hardware industry. To learn more about NetApp stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.