NetApp (NTAP) delivered modestly better-than-expected fiscal Q3 results and showed progress in artificial intelligence workloads, but rising memory costs and limited pre-purchasing activity are increasing the risk of product margin compression in fiscal 2027, Morgan Stanley said in a note Friday.

Stronger US public-sector demand and several large deal closures supported the quarter, while onboarding new neocloud customers to the company's AFX disaggregated storage platform highlighted traction in higher-value AI deployments, the analysts said. But they warned that product gross margins already in the mid-50% range before significant input cost inflation suggest downside risk as memory pricing continues to rise.

The firm added that a quarter-over-quarter inventory decline and limited commentary from management on fiscal 2027 reduce visibility into how NetApp plans to offset higher component costs, raising the likelihood of either price increases that pressure demand or margin deterioration if pricing remains competitive.

Morgan Stanley said it now models roughly $8 in fiscal 2027 earnings per share and continues to see more downside than upside to margins as enterprise storage spending remains cautious.

The firm reiterated its underweight rating on the stock and lowered its price target to $88 from $89.

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