New Threads Only:  Add to Google Reader or Homepage
New Threads & Replies:  Add to Google Reader or Homepage
Forums are for serious investors only. GuruFocus Forum Rules.

Forum List » Value Ideas and Strategies
Share and discuss value investing ideas and investing strategies.
New Topic Search
Goto Thread: PreviousNext
Goto: Forum ListMessage ListNew TopicSearchLog In
EMC Is All Set to Profit From Growing Data Storage Solutions
Posted by: rusticnomad (IP Logged)
Date: June 20, 2014 10:39AM

EMC (EMC) is one of the leading companies in data storage solutions. It also provides various other solutions such as data warehousing, business intelligence, and virtualization. Some of its products like EMC Atmos, Vblock, Mozy, and Syncplicity have gained enough traction in the market as businesses are moving to cloud of late.

Recent performance

EMC put up a decent performance in the second quarter as its revenue surged 6% to $5.61 billion. Also, it was good to notice that EMC's domestic revenue rose 4% to $3 billion that contributes approximately 53% of the total revenue. EMC also attained 8% growth in international revenue that came in at $2.7 billion, driven by its information infrastructure business, Pivotal and VMware.

VMware is a pioneer in virtualization software and a subsidiary of EMC. EMC holds around 80% stake in VMware. VMware registered revenue growth of 11% in its latest quarter from the year-ago period, and posted an income of $244 million, a 28% jump. This strong growth has contributed generously to the top and bottom lines of EMC.

Impressive moves

A new company, Pivotal, was established as an amalgamation of various divisions and products from EMC and VMware. Pivotal's product portfolio will have Pivotal Labs, Cloud Foundry, Greenplum, Gem Fire, Cetas, Greenplum and Vfabix Suit (product of VMware). This strategic move was initiated so that EMC can concentrate on emerging market opportunities such as cloud applications, security applications system, and large scale data management system, which are its core business areas.

Also, the investment of $105 million in Pivotal by General Electric has made the stock more attractive as this strategic investment will certainly boost its growth in the future and increase shareholders' value as EMC is recording steady growth in global market. Its revenue grew 12% in the Asia Pacific and Latin America, while North America revenue was up by 4% and a significant 6% rise was observed in the EMEA regions. Also, EMC's revenue grew 18% in the BRIC nations.

The road ahead

EMC projects total revenue of $23.5 billion for fiscal 2013 and is expecting a rise of 25.5% in non-GAAP operating margin. Also, non-GAAP net income of $4 billion is expected for fiscal 2013. It expects cash flow of $6.8 billion from operating activities, and the free cash flow target is $5.5 billion.

EMC is determined to repurchase a total of $6 billion worth of shares by 2015, and this should have a positive effect on the EPS. Also, looking at the growth trajectory of EMC, the company should be able to at least match its estimates going forward. Moreover, its strategic investment in businesses such as XtremIO, ViPR and Pivotal should also help in attaining its targets and increase its profitability in the coming years.

Competition

Its peer NetApp (NTAP) specializes in IT-enabled business solutions such as data security, cloud solutions, and data management systems. However, it posted a weak performance in the recently declared quarter. Also, its growth prospects do not look very enticing as it registered net revenue of $1.71 billion, a marginal increase of 0.8% from the previous quarter.

Also, NetApp's operating expense increased 7.7% to $827.8 million from the year-ago quarter, which had an impact on its earnings that dipped 7.7% to $204.4 million. In addition to this, NetApp's operating margin also declined to 11.9% as compared to 13% in the year ago quarter.

Also, NetApp is very expensive at current levels. The company trades at a price-to-earnings multiple of almost 29x, while in comparison, EMC trades at a trailing P/E of 20. With quarterly revenue growth slowing down and earnings dropping, the valuation looks rich and investors are advised to stay away from NetApp.

Brocade Communications (BRCD) is another company that provides solutions similar to EMC, but it is a smaller player. Brocade earns 50% of its total revenue from its core service of storage area networks (SAN). However, it faced a 7% decline in revenue in the second quarter from the prior year period. This can be concerning for investors. With major players like Cisco (CSCO), Brocade faces fierce competition for its core business and the company might be in for tough times.

It looks like the company's management is aware of this and that's why they have been selling shares. Wall Tyler, a vice president at Brocade, recently sold around 97,000 shares. Given the recent revenue decline and probability of stiff competition, it is not surprising that an insider sold shares.

Conclusion

EMC's stake in VMware and the constant adoption of the cloud are expected to drive its growth in the future. Moreover, as seen above, the company is cheaper than peers such as NetApp and has a lucrative share repurchase plan in place. So, investors should consider putting their money in this stock if they are looking for a play on the cloud.



Stocks Discussed: EMC,
Rate this post:

Rating: 0.0/5 (0 votes)





Sorry, only registered users may post in this forum.

Please Login if you have an account or Create a Free Account if you don't
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK