Should You Buy NetApp Stock as AI Growth Meets a Premium Valuation?

NetApp, Inc. NTAP is entering fiscal 2027 with faster flash, cloud and AI-related demand and a higher outlook. Management now expects revenues of $7.975-$8.225 billion, with the midpoint implying 17% growth.

The investment question is whether the current price already reflects much of that progress. NTAP trades above its sub-industry and five-year median valuation, while component costs and product mix are pressuring gross margin.

NetApp's AI Growth Case Keeps Strengthening

Fiscal 2026 all-flash revenues reached $4.2 billion, up 11% year over year. In first-quarter fiscal 2027, all-flash revenues climbed 46.6% to a record $1.31 billion. NetApp also recorded more than 1,100 AI and data-preparation wins in fiscal 2026 and added about 350 AI and data lake modernization deals in the latest quarter, with larger deal sizes as customers moved from pilots to production.

DataPelago adds in-place data processing, while AFX and the AI Data Engine target high-performance AI workloads and governed data access. Dell Technologies DELL has expanded its AI Data Platform with NVIDIA to support demanding AI workloads. Hewlett Packard Enterprise HPE has added native file storage to Alletra Storage MP X10000 and AI-driven data-management capabilities aimed at accelerating AI pipelines. Those moves reinforce the competitive pressure around enterprise AI storage.

NTAP's Valuation Leaves Less Room for Error

NTAP trades at 19.5X forward 12-month earnings, compared with 10.7X for its Zacks sub-industry and a five-year median of 16.9X. The multiple is closer to the Zacks Computer and Technology sector's 20.8X and the S&P 500's 20.0X, so the premium is most visible against its own history and storage peer group.

That premium increases sensitivity to execution. Shares have gained 14.8% in the past three months and 56.3% in the past year, making continued AI, flash and cloud growth important to supporting the valuation.

NetApp's Margin Outlook Adds a Key Trade-Off

First-quarter fiscal 2027 non-GAAP gross margin was 70.6%, down 50 basis points year over year as products represented 49% of revenues versus 42% a year earlier. Product gross margin was 54.6% and declined 150 basis points sequentially, mainly because of higher component costs.

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Management expects second-quarter non-GAAP gross margin of 67-68% and fiscal 2027 gross margin of 68.1-69.1%, with a richer product mix limiting the consolidated rate. Fiscal 2027 non-GAAP operating margin guidance of 30.3-31.3% still points to operating leverage despite the gross-margin pressure.

NTAP's Balance Sheet Supports Strategic Flexibility

NetApp ended the quarter with $3.58 billion in cash and investments against $2.49 billion of gross debt, leaving $1.09 billion of net cash. The company returned $302 million through repurchases and dividends, although free cash flow fell 35.3% year over year to $401 million.

Goodwill and purchased intangible assets reached $2.95 billion, about 27% of total assets, up from $2.79 billion at fiscal year-end. Recent acquisitions, including DataPelago and JetStream, add capabilities but also raise the importance of successful integration.

NetApp, Inc. Price and EPS Surprise

NetApp, Inc. price-eps-surprise | NetApp, Inc. Quote

NetApp's Signals Favor Momentum Over Value

For investors considering NTAP now, the fundamentals are improving, but the valuation offers less room for disappointment. The setup is more attractive to investors comfortable paying for earnings and price momentum than to strict value buyers.

NTAP currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Its Momentum Score of A is constructive for investors focused on near-term price and estimate-revision trends. The Value Score of D, Growth Score of C and VGM Score of C make the broader style profile mixed, suggesting that entry price and execution risk still matter despite the favorable short-term rank.

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This article originally published on Zacks Investment Research (zacks.com).

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