NetApp's Margin Recovery and Cloud Software Strength: A Misunderstood Value Play in the AI Infrastructure Era?

In the evolving landscape of enterprise technology, NetApp (NTAP) has emerged as a compelling case study in contrarian value investing. While the company's hybrid cloud transition and AI infrastructure positioning have garnered attention, its stock remains undervalued relative to peers, despite robust financial performance and strategic innovation. This analysis explores why NetApp's margin recovery and cloud software strength position it as a misunderstood value play in the AI infrastructure era.

Margin Recovery: A Foundation for Sustainable Growth

NetApp's fiscal 2025 results underscore a return to profitability, with non-GAAP gross margins stabilizing at 71% for the full year. This marks a significant improvement from earlier volatility and reflects disciplined cost management and a favorable product mix. In Q4 2025, operating margins hit a record 20%, driven by strong demand for high-margin solutions like all-flash arrays and cloud services. Such margin resilience is rare in the storage sector, where price competition often erodes profitability.

The company's ability to maintain margins while scaling its cloud offerings is particularly noteworthy. Public cloud gross margins, for instance, surged to 76% in Q3 2025 compared to 66% in the prior year, highlighting NetApp's pricing power in its fastest-growing segment. This margin expansion, coupled with a 31.1% operating margin in Q2 2026, suggests NetApp is not merely stabilizing but accelerating its path to profitability.

Cloud Software Strength: A Catalyst for Long-Term Value

NetApp's cloud software segment has become a cornerstone of its growth strategy. Public cloud revenue grew 32% year-over-year in Q3 2025, reaching $174 million, while first-party and marketplace cloud storage services expanded by over 40% according to results. These figures outpace many cloud-native peers and reflect the company's unique position as a hybrid cloud enabler.

Innovations such as the AFF C-Series systems and StorageGRID software have further solidified NetApp's cloud leadership. The company's Keystone storage-as-a-service offering, which saw a 76% year-over-year increase in total contract value, exemplifies its ability to monetize recurring revenue streams. Partnerships with hyperscalers like AWS and Google Cloud also position NetApp to capitalize on the growing demand for interoperable cloud solutions.

AI Infrastructure Positioning: A Strategic Differentiator

NetApp's foray into AI infrastructure has been a game-changer. In Q4 2025, the company closed 150 AI infrastructure deals, including collaborations with NVIDIA and other hyperscalers. These efforts have driven a fivefold year-over-year growth in its AI business, with all-flash storage revenue hitting $4.1 billion annually according to analysis.

The company's AI Data Engine and AFX platforms are tailored to handle enterprise AI workloads, a market expected to grow exponentially. NetApp's 300-basis-point market share gain in all-flash storage underscores its competitive edge, as enterprises prioritize performance and scalability for AI applications. This strategic alignment with AI trends positions NetApp to benefit from long-term secular growth.

Valuation: A Contrarian Opportunity

Despite these strengths, NetApp trades at a discount relative to peers. As of Q4 2025, its EV/EBITDA ratio stands at 13.43, well below the cloud/storage industry average of 17.6x according to industry analysis. This gap is even more pronounced when considering NetApp's 18.7x PE ratio which lags the tech industry average, which is 22.1x. Analysts have taken note: a DCF analysis estimates an intrinsic value of $176 per share, implying a 37.7% undervaluation.

The stock's undervaluation is further highlighted by analyst price targets. While the consensus rating is "Hold," seven analysts have issued "Buy" recommendations, with a high price target of $160 (33.8% upside from current levels). This divergence between fundamentals and market sentiment suggests a potential inflection point for the stock.

Analyst Sentiment: Mixed Signals, but Room for Optimism

Wall Street's mixed sentiment reflects cautious optimism. In the past month, 16 analysts rated NetApp, with six issuing "Buy" and 14 "Hold." The average 12-month price target of $121.91 implies a 13.6% upside from the last price of $107.30 according to forecast data. Notably, bullish analysts like J.P. Morgan's Samik Chatterjee and TD Cowen's John Blackledge have cited NetApp's AI and cloud momentum as key drivers according to analyst reports.

While the "Hold" consensus may indicate skepticism about execution risks, the company's recent guidance raises-projecting $6.625–$6.875 billion in FY2026 revenue-suggests management is confident in its trajectory. This optimism is grounded in disciplined cost controls and a product mix skewed toward high-growth areas.

Conclusion: A Misunderstood Value Play

NetApp's margin recovery, cloud software strength, and AI infrastructure positioning collectively paint a compelling case for contrarian value investors. The company's ability to stabilize margins while scaling high-margin cloud and AI offerings is rare in its sector. Yet, its valuation remains anchored to legacy metrics, failing to fully reflect its strategic transformation.

For investors willing to look beyond short-term volatility, NetApp represents a unique opportunity. As enterprises accelerate their hybrid cloud and AI adoption, NetApp's differentiated solutions and disciplined execution could unlock significant upside. In a market that often overvalues hype over fundamentals, NetApp's undervaluation may prove to be a golden opportunity.