HP downgrade part of Goldman Sachs analyst's IT hardware and software ratings shuffle
Goldman Sachs analyst Rod Hall shuffled his ratings for some IT hardware and software names, upgrading Pure Storage (PSTG) to Buy, while downgrading both HP Inc. (HPQ) and NetApp (NTAP) to Sell and Cisco (CSCO) to Neutral. While he expects Pure Storage to continue to gain share in the storage market, the analyst sees a "substantially tougher environment" for HP Inc. in 2020 as near-term tailwinds reverse in the PC business.
BUY PURE STORAGE: In a research note to investors, Goldman Sachs' Hall upgraded Pure Storage to Buy from Neutral and raised his price target on the shares to $21 from $18. The analyst expects the company to continue gain share in the storage market with its new products and with its mid-market exposure, even as "large enterprise spending weakness disproportionately hurts larger storage vendors." He believes its new FlashArray//C product could drive an acceleration in revenue growth should the product see a revenue ramp similar to Pure's earlier launches, and as it puts the company in a "strong position" to participate in a much larger hybrid/disk storage segment of the market with a significantly lower AFA price-point. Overall, Hall believes Pure Storage is relatively undervalued versus peers, with potential for the multiple to re-rate in the future as execution gets better.
SELL HP, NETAPP: Goldman Sachs’ Hall also downgraded HP Inc. to Sell from Neutral and lowered his price target on the shares to $14 from $18. The analyst sees a "substantially tougher" environment for HP in 2020 as near-term tailwinds reverse in the PC business while the company attempts a "difficult transition" in the Printing business. While consumer PCs have been weak, this has been masked by strength in commercial PCs, the analyst noted. However, he expects this strength to fade in 2020, particularly in the second half of the year. Further, the analyst sees "significant risk" to Printing profits as the Supplies business "continues to deteriorate," adding that he believes PC and Printer demand are sensitive to macro conditions which appear to be slowing.
Additionally, Hall double downgraded NetApp to Sell from Buy and cut his price target on the stock to $45 from $61, as he believes the company’s guidance is optimistic in an environment where large enterprise spending appears to be deteriorating further. NetApp's fiscal 2020 revenue guidance implies a recovery in core product revenue growth despite the slowdown in July, the analyst pointed out. However, his firm's analysis suggests large enterprise spending is likely to continue to decline in the midst of ongoing trade and economic uncertainty. Further, Hall believes NetApp's fundamentals are likely to continue to weaken.
MOVING TO THE SIDELINES ON CISCO: Meanwhile, Goldman Sachs' Hall downgraded Cisco Systems to Neutral from Buy and lowered his price target on the shares to $48 from $56, arguing that large enterprise spending will continue to weaken and telecom spending activity will remain depressed in the near-term. The analyst noted that his proprietary Enterprise Activity Index deteriorated in September, and his latest reseller survey was also incrementally negative on enterprise spending trends. In the telecom segment, Hall is concerned that negative trends could persist well into 2020, driven by carrier pauses ahead of 5G and needed carrier network automation implementation. On a more positive note, the demand environment in the Commercial segment remains positive, he noted, adding that the Cat 9k campus cycle should have more room to run.
PRICE ACTION: In late morning trading, shares of Pure Storage have gained about 4% to $16.99. Meanwhile, HP Inc., NetApp and Cisco have slid about 2% apiece to $16.09, $50.47 and $45.93, respectively.