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Questor: forget Spotify, this is the tech stock to buy
Tech firms are great “disrupters” but sometimes they are themselves the victims of changes in technology. This week’s pick is priced as if it is a potential victim but is actually in the forefront of a new computing trend.
That new trend is the use by larger enterprises of a sophisticated approach to the storage of their data. Traditionally firms have owned their own computer systems, including the hard disks or other devices that store their data. But recently more data has been moved to online storage systems, sited remotely from the company, run by a third party but accessible from anywhere over the internet. This is “cloud” computing.
While the details may sound technical, data storage can be crucial to an organisation’s vital functions: an online retailer, for example, must be able to offer its users a fast website with access to price and stock data, while its own operational information must be highly secure.
Some companies are now taking a hybrid approach to data storage that provides the optimum level of accessibility for the various types of data, while keeping overall costs to a minimum. This hybrid approach is to put certain functions – the company’s website, perhaps – in the cloud, and others, such as a design system for new products, in the firm’s own premises.
Data stored in the cloud may be further differentiated: a company’s old accounts, for example, won’t need to be accessed very often but must be secure, whereas its website must be speedily accessible, perhaps from anywhere in the world.
Managing a hybrid approach to data storage is where today’s stock comes in. Network Appliances or NetApp, listed in America, offers software that can manage the process. This software evolved from earlier versions that handled more traditional disk storage systems supplied by the company.
The crucial point as far as investors are concerned is that the market seems to regard NetApp still as a supplier of those traditional systems, and therefore unlikely to grow. It doesn’t seem to have appreciated the ability of the company’s software to be at the heart of the growing trend towards hybrid storage.
Walter Price, whose Allianz Technology Trust holds a stake in NetApp, told Questor: “Smaller firms may say ‘we’ll use the cloud for everything, end of story’ but big ones need to make decisions about how to store different types of data. As far as I know, NetApp’s software is unique in being able to manage this process.
“However, for a long time NetApp tried to ignore the cloud, and another trend, the move to semiconductor-based storage. It was indeed clinging to its past. It needed a new generation of management to change the focus, and that arrived in 2015 when George Kurian took over as chief executive.”
Price described the new management team as “very smart” and added: “The old team was very focused on the hardware but Kurian is more of a software guy. It’s a new approach.” The market’s outdated perception of the stock has given it a low valuation, Price said.
“It’s valued at less than 10 times cash flow, or at about 15 times our estimate of earnings in the year to April 2019. It offers a rare combination of low multiple and good outlook. Companies that offer its kind of high-margin, high-value product often trade at 50 times earnings.”
Another welcome development is that, thanks to US tax reforms, the company is repatriating billions of dollars previously held offshore. This cash may be used to buy back stock or increase the dividend significantly. “The stock yields 1.3pc now and this could double or triple,” Price said.
One to buy before the market catches on.
Questor says: buy
Ticker: NASD:NTAP
Share price at 5pm: $60.04
Update: Sophos
Our conversation with Price gave Questor the opportunity to get his views on Sophos, tipped in October last year at 620p. The shares now stand at 427.6p but Price said: “It is one of the leaders in security software but the shares were hammered because, after a strong rise in sales after the launch of a new product, revenue growth naturally slowed.
“Investors are simple-minded sometimes and think that if sales slow there must be something wrong. But I think the firm can still grow at 15pc-20pc a year. The shares could well come back to hit new highs. The firm is also an attractive acquisition target.”
Questor says: hold
Ticker: SOPH
Share price at close: 427.6p