Government Shutdown Introduces Uncertainty For NetApp's Quarter, DA Davidson Says

NetApp Inc. NTAP shares have run up about 65 percent over the past four months, reflecting the company's strong position in the storage market.

The Analyst

DA Davidson analyst Mark Kelleher downgraded NetApp from Buy to Neutral, but increased his price target from $58 to $64, with the price target revision attributed to higher P/E/G assumption to account for the company's improved market position.

The Thesis

Fundamentally, NetApp has executed a significant realignment, as it moved aggressively into the Flash storage system market, Kelleher said in a Tuesday note. The headwind of mature products continues to moderate even as growth products provide a strong revenue tailwind, the analyst said.

Given NetApp's reliance on the government sector, with Kelleher valuing it at 10 percent of the company's revenues, he said the recent shutdown, though lasting for merely three days, could have a significant impact on the January quarter results. This, according to the analyst, is due to the typical back-end bias to orders.

"Also, based on the 2013 shut-down, we believe simply re-opening the federal government may not be enough to mitigate spending reductions from that sector, as continued uncertainty with respect to long-term budget financing may delay orders," the analyst said.

DA Davidson believes the re-opening of the federal government is only a short-term solution, providing funds for running the government until Feb. 18.

The Price Action

NetApp shares have gained over 23 percent over the past year.

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