Is NetApp (NTAP) a Buy After Strong Q2 Earnings and Improved Margins?

NetApp’s Q2 2025 earnings report delivered a mixed but largely positive outlook, with revenue of $1.56 billion—a 1.2% year-on-year increase—and non-GAAP EPS of $1.55, both exceeding analyst expectations [1]. The company’s operating margin improved to 19.8%, up from 18.3% in the prior year, while its all-flash array segment saw annualized net revenue of $3.8 billion, a 19% growth [2]. These results, coupled with a 106.7% surge in free cash flow to $620 million in Q1 FY2026, suggest short-term momentum is intact [5]. However, the long-term investment thesis hinges on whether NetApp can align with the rapidly evolving cooling tech sector, which is critical to sustaining data center efficiency amid AI-driven demand.

Short-Term Momentum: Strong Execution, But Challenges Loom

NetApp’s Q2 performance highlights its ability to capitalize on its core strengths. The 1.2% revenue growth, though modest, outpaced the broader market’s struggles with macroeconomic headwinds. The company’s focus on all-flash arrays—a segment growing at 19% YoY—demonstrates its relevance in an era where speed and efficiency are paramount [2]. Additionally, the record free cash flow in Q1 FY2026 underscores its financial discipline, a key metric for investors evaluating dividend sustainability and buyback potential [5].

Yet, the company’s guidance for Q2 CY2026 ($1.61–$1.76 billion) and FY2026 ($6.625–$6.875 billion) implies cautious optimism. While these ranges reflect confidence in cloud and AI-driven storage demand, they also suggest NetApp is not fully capitalizing on the broader data center cooling boom. For instance, the global cooling market is projected to grow at a 16.46% CAGR through 2030, driven by AI’s insatiable appetite for high-performance computing [1]. NetApp’s current offerings, while efficient, lack direct integration with cutting-edge cooling technologies like immersion cooling or direct-to-chip liquid cooling, which are becoming table stakes for hyperscale operators [3].

Long-Term Profitability: Cooling Tech as a Strategic Crossroads

The cooling sector’s growth is not just a peripheral trend—it is a structural shift that could redefine data center economics. By 2030, the market is expected to reach $40.72 billion, with liquid cooling solutions alone forecasted to grow at 19.10% CAGR [4]. NetApp’s partnerships, such as FlexPod with Cisco, offer indirect alignment with these trends. FlexPod’s midplane-free designs and support for liquid cooling reduce power consumption and rack density, aligning with the sector’s sustainability goals [1]. However, NetApp’s direct engagement remains limited. For example, while it uses reclaimed water in cooling towers at its Research Triangle Park facility, it has not disclosed similar innovations in its product lines [4].

This gap presents both a risk and an opportunity. Competitors like Sandisk and Pliops are already developing storage solutions optimized for AI inference, which could reduce memory constraints on edge devices and indirectly lower cooling demands [1]. If NetApp fails to integrate similar advancements, it risks ceding market share to rivals who better address the thermal challenges of AI workloads. Conversely, its recent partnership with Google Cloud—earning it the 2025 Infrastructure Modernization Partner of the Year for Storage—shows it is pivoting toward sustainable, scalable solutions [4]. This could position NetApp to benefit from the $22.57 billion liquid cooling market by 2034 [4].

Valuation and Strategic Risks

NetApp’s current valuation, with a forward P/E of ~18 and a PEG ratio of 1.2, appears reasonable given its margin improvements and cloud growth. However, the stock’s performance is likely to hinge on its ability to adapt to cooling tech trends. For instance, the company’s Q4 FY2025 revenue of $1.73 billion was driven by all-flash storage and cloud services, but it did not explicitly tie these gains to cooling efficiency [1]. This lack of transparency could deter investors seeking clarity on NetApp’s role in the sector.

A critical question remains: Can NetApp’s indirect contributions (e.g., storage density improvements) offset its absence in the direct cooling tech market? The answer may lie in its partnerships. FlexPod’s energy-efficient designs and NetApp’s sustainability commitments suggest a strategic alignment with industry needs [1]. Yet, without a clear roadmap for integrating advanced cooling technologies into its products, the company risks being perceived as a laggard.

Conclusion: A Buy for the Short Term, But Watch the Long Game

NetApp’s Q2 results and margin improvements justify a near-term “buy” rating, particularly for investors focused on its cloud and AI storage growth. However, the long-term outlook depends on its ability to navigate the cooling tech sector’s rapid evolution. While partnerships like FlexPod and Google Cloud provide a foundation, NetApp must accelerate its integration of direct cooling solutions to remain competitive. For now, the stock offers a compelling entry point, but investors should monitor its strategic moves in the coming quarters.

**Source:[1] NetApp's (NASDAQ:NTAP) Q2 Sales Beat Estimates But Stock ... [https://finance.yahoo.com/news/netapp-nasdaq-ntap-q2-sales-202938090.html][2] NetApp Reports Second Quarter of Fiscal Year 2025 Results [https://www.netapp.com/newsroom/press-releases/news-rel-20241121-results-270088/][3] Data Center Trends & Cooling Strategies to Watch in 2025 [https://airsysnorthamerica.com/data-center-trends-cooling-strategies-to-watch-in-2025/][4] Data Center Liquid Cooling Market Size to Worth USD ... [https://www.precedenceresearch.com/data-center-liquid-cooling-market][5] NetApp Posts 107% Cash Flow Jump in Q1 [https://www.theglobeandmail.com/investing/markets/stocks/NTAP/pressreleases/34434775/netapp-posts-107-cash-flow-jump-in-q1/]