Western Digital vs. NetApp: Which Data Stock is a Better Buy?

NetApp, Inc. (NTAP) in Sunnyvale, Calif., and Western Digital Corporation (WDC) in San Jose, 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. In comparison, WDC develops, manufactures, and sells data storage devices and solutions, mainly hard-disk drives (HDDs) and solid-state drives (SDDs), and serves OEMs, distributors, resellers, and retailers worldwide.

The growing demand for data storage devices and solutions from enterprises to make better decisions and deliver insightful analytics has helped companies that offer data storage solutions to generate significant revenues over the past year. The continued adoption of hybrid working models and rising cybersecurity threats should further drive the industry’s growth. The global Data Storage market is expected to grow at a 7.1% CAGR to $76.22 billion by 2026. Therefore, NTAP and WDC should benefit substantially.

But, while WDC’s shares have declined 16.6% in price over the past three months, NTAP has surged 13.2%. NTAP is also a clear winner with 105.3% gains versus WDC’s 43.6% returns over the past year. But which of these stocks is a better pick now? Let’s find out.

Latest Developments

NTAP announced enhancements in its ONTAP Data Management Software and Data Services across its hybrid cloud portfolio on October 20. The enhancements are to help organizations modernize their IT infrastructures and accelerate digital transformation. By offering enhanced protection against ransomware, NVMe/TCP support for accelerated performance, new digital wallet capabilities for NetApp Cloud Manager, and flexible consumption options to better control costs, NTAP is looking forward to seeing high demand across organizations in the coming months.

On June 22, 2021, WDC announced its second-generation UFS 3.1 storage solution for smartphones--Western Digital iNAND MC EU551--which delivers high-performance storage for consumers that are using ultra-high-resolution cameras, AR/VR gaming, and 8K video and other applications. As networks continue to expand available bandwidth and offer lower latency to enable new user experiences, WDC’s iNAND solutions are expected to see good demand in the coming months.

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 the fiscal first quarter, ended October 1, 2021, WDC’s non-GAAP revenues increased 28.8% year-over-year to $5.05 billion. The company’s non-GAAP gross profit was $1.71 billion, representing a 66.1% rise from the prior-year period. Its non-GAAP operating income came in at $952 million, up 194.7% from the prior-year period. WDC’s net income came in at $787 million, indicating a 301.5% rise from the year-ago period. Its non-GAAP EPS increased 283.1% year-over-year to $2.49. The company had $3.29 billion in cash and cash equivalents as of October 1, 2021.

Past and Expected Financial Performance

NTAP’s net income and EPS have grown at CAGRs of 47.2% and 56.5%, respectively, over the past three years. The company’s levered free cash flow has grown at a 7.9% CAGR over the past three years.

Analysts expect NTAP’s EPS to increase 23.4% year-over-year in the current year and 9.6% next year. Its revenue will increase 9% year-over-year in the current year and 5.5% next year. The company’s EPS is expected to grow at an 8.8% rate per annum over the next five years.

In comparison, NTAP’s net income and EPS have increased at CAGRs of 43.5% and 42.6%, respectively, over the past three years. WDC’s levered free cash flow has declined at a 20.8% CAGR over the past three years.

WDC’s EPS is expected to rise 66.4% year-over-year in the current year and 28.5% next year. Its revenue is expected to rise 76.5% year-over-year in the current year and 38.8% next year. And the stock’s EPS is expected to grow at a 43.5% rate per annum over the next five years.

Valuation

In terms of non-GAAP forward PEG, NTAP is currently trading at 1.72x, which is 377.8% higher than WDC’s 0.36x. In terms of forward EV/Sales, WDC’s 1.11x compares with NTAP’s 2.92x.

Profitability

WDC’s trailing-12-month revenue is almost 3.1 times higher than NTAP’s. However, NTAP is more profitable, with a 20.8% EBITDA margin versus WDC’s 16.1%.

Also, NTAP’s 170.3%, 7.6%, and 19.4% respective ROE, ROA, and ROTC compare favorably with WDC’s 14.2%, 4.4%, and 5.8%.

POWR Ratings

While NTAP has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, WDC has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both NTAP and WDC have C grades for Stability, in sync with their slightly higher volatility than the broader market. NTAP has a 1.27 beta, while WDC has a 1.63 beta.

In terms of Quality, NTAP has been graded an A, which is consistent with its higher-than-industry profitability ratios. NTAP’s 66.8% trailing-12-month gross profit margin is 35.8% higher than the 49.2% industry average. In comparison, WDC has a C grade for Quality, in sync with its slightly lower-than industry profit margins. The company has a 28.9% trailing-12-month gross profit margin, which is 41.4% lower than the 49.2% industry average. Of the 51 stocks in the B-rated Technology - Hardware industry, WDC is ranked #22. On the other hand, NTAP is ranked #2 of 3 stocks in the A-rated Technology - Storage industry.

Beyond what we’ve stated above, our POWR Ratings system has also rated NTAP and WDC for Growth, Momentum, Value, and Sentiment. Get all WDC ratings here. Also, click here to see the additional POWR Ratings for NTAP. 

The Winner

The rising demand for efficient and secure data storage and management platforms from enterprises should enable NTAP and WDC to grow substantially. But its higher profitability we think makes 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 - Hardware industry, and here for those in the Technology - Storage industry.

NTAP shares were trading at $90.26 per share on Tuesday afternoon, up $0.14 (+0.16%). Year-to-date, NTAP has gained 39.79%, versus a 24.75% rise in the benchmark S&P 500 index during the same period.

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...