NetApp (NTAP) stock jumped about 22% on May 29 after reporting strong fourth-quarter earnings and raising expectations for FY2027. Morgan Stanley responded by lifting its price target from $88 to $137, citing growing evidence that enterprise AI spending is beginning to translate into real storage demand.

AI deployments are driving new orders and supporting growth, but investors want to see whether NetApp can turn that momentum into sustained earnings growth while managing higher memory costs.

AI storage demand lifts FY2027 outlook

Morgan Stanley’s biggest takeaway from the quarter was that AI activity is translating into meaningful infrastructure spending.

NetApp reported roughly 500 AI and data-preparation wins during the quarter, helping revenue rise 12% year-over-year to $1.95 billion, while all-flash array revenue climbed 18% to $1.2 billion. Morgan Stanley said the growing number of AI deployments suggests enterprise spending is moving beyond experimentation and into production environments.

That momentum helped support FY2027 revenue guidance of $7.325-$7.575 billion, which indicates stronger growth than many investors expected. Morgan Stanley noted that demand appears increasingly tied to enterprise AI adoption and hybrid cloud deployments rather than temporary spending trends.

NetApp’s FY2027 outlook moved higher as roughly 500 AI wins began translating into real storage demand, supporting stronger growth expectations.

Eugene Mymrin via Getty Images

Additionally, Morgan Stanley noted that a growing portion of AI wins are coming from customers outside NetApp’s installed base, suggesting the company is gaining exposure to new AI workloads rather than simply benefiting from refresh cycles.

Investors now want to see whether AI-related storage spending continues to broaden through FY2027. If all-flash growth remains strong and AI deployments continue expanding across enterprise customers, NetApp’s most recent quarter could mark the beginning of a larger spending cycle.

Memory inflation clouds near-term margin path

While the revenue outlook improved, Morgan Stanley believes margins remain the largest risk to the story.

NetApp guided for FY2027 gross margins to be about 68.5% to 69.5%, below the 70.5% delivered in the fiscal fourth quarter. Management pointed to elevated NAND and DRAM costs as the primary headwind and said product gross margin should bottom in the fiscal fourth quarter before gradually improving through the year.

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Morgan Stanley noted that NetApp is taking a more measured pricing approach than some competitors. Rather than fully offsetting inflation through price increases, the company is prioritizing gross profit dollars and customer relationships, which could leave margins under pressure even as demand improves.

Pricing, product mix, and operating control will determine whether stronger AI and flash demand produce a stronger earnings base in NetApp’s upcoming FY2027.

Strong cash returns provides valuation support

Even with its more constructive outlook, Morgan Stanley remains cautious on valuation, giving the stock an Underweight rating.

The firm raised its FY2027 EPS estimate to $8.83 and increased its price target to $137, but maintained its Underweight rating due to uncertainty around demand visibility in the second half of the year, margin pressure, and the durability of market-share gains.

One factor supporting the stock is capital returns. NetApp generated approximately $1.87 billion of free cash flow during FY2026, increased its share repurchase authorization by $1 billion, and plans to return up to 100% of FY2027 free cash flow to shareholders.

Why NetApp could outperform expectations

• AI storage deployments are turning into real orders, supporting stronger revenue growth.
• All-flash products are gaining traction, creating more expansion opportunities with existing customers.
• Hybrid cloud adoption is increasing platform usage and software revenue.
• Pricing actions are helping offset memory inflation and support margin recovery.
• Share repurchases boost EPS growth and enhance shareholder returns.

Risks that could pressure NetApp stock

• The stock is up 60% in the past month, which might limit future returns.
• NAND and DRAM inflation could continue weighing on hardware margins.
• AI deployments may stay small, limiting follow-on orders and future growth.
• Large enterprise deals could slip between quarters, creating revenue volatility.
• Product mix could shift toward lower-margin configurations.
• Competitors may bundle storage with broader AI offerings and pressure market share.

Key takeaways for NetApp

NetApp’s latest results strengthened the company’s AI infrastructure story. Roughly 500 AI wins, 18% all-flash revenue growth, and FY2027 revenue guidance of $7.325 billion to $7.575 billion suggest enterprise AI spending is beginning to translate into real storage demand.

Rising NAND and DRAM costs are pressuring hardware profitability in the near term. The next step for NetApp will be proving that stronger AI demand can lift margins and earnings.

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