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Should Value Investors Pick NetApp (NTAP) Stock Now?

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put NetApp, Inc. NTAP stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, NetApp has a trailing twelve months PE ratio of 19.5, as you can see below:



This level compares somewhat favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 20.7. If we focus on the long-term trend of the stock the current level puts NetApp’s current PE slightly below its highs over the observed period, with the number having risen rapidly over the past few months.



Further, the stock’s PE compares slightly higher than the Computer and Technology sector’s trailing twelve months PE ratio, which stands at 22.7. At the very least, this indicates that the stock is slightly overvalued right now, compared to its peers.

We should also point out that the company has a forward PE ratio (price relative to this year’s earnings) of 14.7, so it is fair to say that a slightly more value-oriented path may be ahead for the stock in the near term too.

PS Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, NetApp has a P/S ratio of about 2.3. This is lower than the sector’s average, which comes in at 3.6 right now.



Notably, NTAP is actually towards the higher zone of its trading range in the time period per the P/S metric, which suggests that the company’s stock price has already appreciated to some degree, relative to its sales.

Broad Value Outlook

In aggregate, NetApp currently has a Zacks Value Style Score of A, putting it into the top 20% of all stocks we cover from this look. This makes NetApp a solid choice for value investors, and some of its other key metrics make this pretty clear too.

What About the Stock Overall?

Though NetApp might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of A and a Momentum score of F. This gives NTAP a Zacks VGM score—or its overarching fundamental grade—of B. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been trending downwards. The current year has seen 10 estimates go higher in the past sixty days compared to none lower, while the full year estimate has also seen 10 upward revisions and no downward revision in the same time period.    

This has had a meaningful impact on the consensus estimate, as the current quarter consensus estimate has jumped 13.3% in the past two months, while the full year estimate has moved north by nearly 11%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

NetApp, Inc. Price and Consensus

In spite of the slightly bearish analyst opinion, the stock’s Zacks Rank #1 (Strong Buy) indicates robust fundamentals and expectations of outperformance in the near term.

Bottom Line

NetApp is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics. Its industry ranks among the Top 43% out of more than 250 industries, signaling that the stock is likely to benefit from favorable broader factors in the immediate future. However, the industry has underperformed the broader market over the past six months, as you can see below:

 



Also, given the negative trend in earnings estimate revisions, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.

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