RBC Capital Downgrades NetApp (NTAP) to Sector Perform; SolidFire Acquisition Makes Takeout Unlikely
RBC Capital downgraded NetApp (NASDAQ: NTAP) from Outperform to Sector Perform with a price target of $28.00 (from $38.00). Analyst Amit Daryanani called the deal to acquire SolidFire is materially dilutive to near-term EPS and will make NTAP a less likely takeout candidate."
"We are downgrading NTAP to Sector Perform from Outperform after the company announced the acquisition of SolidFire for $870M last night, as it simultaneously lowers the company's forward operating margins and makes NTAP a less likely takeout candidate," Daryanani commented. "Our downgrade is predicated on: 1) Adding Operating Losses: We think SolidFire will add $65–75M of operating losses to the model given the high cash burn rate and will dilute FY17 EPS by $0.25–0.30; 2) Doesn’t Change the Organic Headwinds: While the ~$100M of FY17 revenues NTAP will get from SolidFire are attractive, it will be sub 2% of the total company that we think could decline mid-to-high single digits; 3) Operating Margins Heading Lower: We think this transaction and future investments will place a downward bias on NTAP's target of 18–20% op-margins; and 4) Unlikely Takeout: Our initial upgrade thesis back in July was based on the potential for NTAP to be acquired, and we think this deal makes that unlikely."
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Shares of NetApp closed at $27.60 yesterday.