Zacks Industry Outlook Highlights NetApp, Pure Storage and Teradata

Chicago, IL – June 7, 2023 – Today, Zacks Equity Research discusses NetApp NTAP, Pure Storage PSTG and Teradata Corp. TDC.

Link: https://www.zacks.com/commentary/2104276/3-storage-devices-stocks-to-watch-for-in-a-challenging-industry

The Zacks Computer-Storage Devices industry benefits from encouraging trends in PC shipments and the solid momentum in cloud computing, Internet of Things (IoT), auto, connected devices, virtual reality and Artificial Intelligence (AI). These factors propel the demand for robust data storage solutions, bolstering the requirement for computer storage products. These factors are favorable for prominent industry players like NetApp, Pure Storage and Teradata Corp..

The democratization of higher internal memory smartphones, faster Internet speed and 5G is likely to act as a tailwind for industry participants. The rapid deployment of 5G networking is driving the proliferation of IoT, Advanced Driver Assistance Systems (ADAS) and Augmented Reality/Virtual Reality (AR/VR) devices. However, cautious IT spending amid global macroeconomic turbulence is a major headwind in the near term along with volatile supply chain dynamics, inflation and component shortages.

The Zacks Computer-Storage Devices industry houses companies that design, develop, manufacture and market various hard disk drives (HDDs) and solid-state drives (SSDs). These drives are utilized in PCs, laptops, mobiles, servers, network-attached storage (NAS) devices, video game consoles, digital video recorders and other consumer electronic devices. A few industry participants, including Pure Storage, provide software-defined all-flash solutions that are uniquely fast and cloud-capable for customers.

Many industry players offer high-performance modular memory subsystems, mount and blade server systems, enterprise storage and data management software and hardware products and services. Some industry participants also provide purpose-built servers for storing and accessing data over a shared network or the Internet.

New Normal Trends & Rapid Implementation of 5G Opening New Business Avenues: Implementation of hybrid work models have triggered the demand for data-intensive applications like video conferencing and cloud services. Effective storage is essential for harnessing data and is expected to raise demand for high-storage capable SSDs and internal memory in advanced smartphones. The accelerated deployment of 5G and rebound in the smartphone market will likely propel the industry to newer heights. Extensive implementation of cloud computing solutions, increased Internet usage and rapidly-growing media and regulatory compliance have led to a data explosion for enterprises.

Innovation in Cloud Storage Technologies to Drive Adoption: broader storage options from collocated hardware (such as hard disks and tape drives) to many cloud storage solutions have put the industry on a growth trajectory. The industry players are well poised for growth on the back of a rapid increase in the amount of data, the complexity of data formats and the need to scale resources at regular intervals.

These companies rely on Artificial Intelligence for IT Operations (AIOps) and machine learning (ML) to manage and optimize storage solutions. To streamline data storage, companies are relying on virtualization technologies. As more data is amassed from IoT, companies are turning to edge computing architecture to reduce latency and boost flexibility. Kubernetes storage is becoming increasingly popular as it facilitates greater agility and scalability. This has bolstered the deployment of high-capacity mass storage products, which is a positive for industry players.

Macro Headwinds May Prove a Drag on IT Spending in the Near Term: Weakening IT spending amid global macroeconomic weakness is likely to remain a headwind in the near term. Increased budget scrutiny, especially cloud-cost optimization by clients and forex volatility, are affecting top-line performance of the industry participants. Consumer spending cuts on the purchase of PCs, tablets and printers are likely to hinder IT spending growth. In the long run, higher technology spending on transformation projects including data security, application modernization, analytics and AI by enterprises augurs well for industry participants.

Slowing Momentum in PC Shipments Might Hinder Growth Prospects: Worldwide PC shipments declined 30% to 55.2 million units in the first quarter of 2023, according to the data compiled by Gartner. Sales were affected by a huge inventory pile-up amid a slump in demand. Intense promotional activity by vendors to clear inventory was another headwind. Further, global macroeconomic weakness, geopolitical instability in Europe and inflationary pressure are leading to careful IT spending by business organizations. A slowing PC market does not augur well for the industry participants.

The Zacks Computer Storage is housed within the broader Zacks Computer And Technology Sector. It carries a Zacks Industry Rank #173, which places it in the bottom 31% of more than 250 Zacks industries.

The group's Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates dim near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks you may want to consider for your portfolio, considering bright prospects, let us look at the industry's recent stock-market performance and valuation picture.

The Zacks Computer-Storage Devices industry outperformed the Zacks S&P 500 composite index but lags the broader sector in the past year.

The industry has gained 5.3% over this period compared with the S&P 500's gain of 3.3%. The broader sector has gained 10.7% in the same time frame.

On the basis of forward 12-month P/E (or Price/Earnings), which is a commonly used multiple for valuing computer storage devices companies, we see that the industry is currently trading at 201.26X compared with the S&P 500's 19.01X. It is also above the sector's forward-12-month P/E of 24.77X.

In the past five years, the industry has traded as high as 201.26X and as low as 10.59X, with the median being 15.85X.

NetApp: NetApp's remains well-poised to gain from data-driven digital and cloud transformations. Frequent product launches and secular trends in Artificial Intelligence (AI) and high-performance computing bodes well. Extensive cost-discipline measures and dividend and share repurchase activity are noteworthy. NetApp recently announced a new additional $1-billion share repurchase authorization.

NetApp expects fiscal 2024 revenues to decline in the low-to-mid single digits range on a year-over-year basis. Weakening IT spending environment and cloud cost optimization amid macroeconomic turbulence weigh on the performance along with forex volatility. Management believes that these are temporary headwinds and expects IT spending to rebound in time.

NetApp carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 (Strong Buy) Rank stocks here.

The Zacks Consensus Estimate for fiscal 2024 earnings for the company improved by a cent to $5.49 per share in the past seven days. Its long-term earnings growth rate is pegged at 8.8%.

Pure Storage: Pure Storage's performance is gaining from continued momentum in subscription services' revenues. Subscription revenues are gaining from the robust adoption of Evergreen subscription services. The company is likely to benefit from the growing demand for its FlashArray and FlashBlade businesses. Frequent product launches and an increasing customer base are tailwinds. PSTG added more than 276 customers in the last reported quarter. The company's customer base has more than 11,500 customers and represents 58% of Fortune 500 companies.

The company reiterated its revenue guidance for fiscal 2024. Amid current macroeconomic weakness, Pure Storage expects revenues to grow in the range of mid-to-high single digits on a year-over-year basis. The non-GAAP operating margin is expected to be 15%.

Shares of PSTG, which carries a Zacks Rank #3, have gained 23.3% in the past year. The Zacks Consensus Estimate for fiscal 2024 earnings for the company improved by 1 cent to $1.32 per share in the past seven days. Its long-term earnings growth rate is pegged at 15.2%.

Teradata: Teradata's performance is gaining from solid growth in public cloud annual recurring revenues. This was attributed to rising cloud deals and strong momentum in the Americas, Europe, the Middle East & Africa and the Asia Pacific and Japan regions. Cost improvements in subscription and cloud business remain positive. The company is gaining momentum among customers on the back of its analytics platform Vantage on-prem, which is a tailwind. However, declining perpetual and consulting revenues remain concerning for the company.

Shares of Teradata, which carries a Zacks Rank #3, have gained 23.1% in the past year.

The Zacks Consensus Estimate for 2023 earnings for the company remained unchanged at $1.96 per share in the past 60 days.

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