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EMC: Is It a Good Long-Term Buy?

March 19, 2014 | About:
mitu77

mitu77

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EMC (EMC) is among the leaders in data storage solutions. It also provides various other solutions such as data warehousing, business intelligence, virtualization, etc. Some of its products such as EMC Atmos, Vblock, Mozy and Syncplicity are gaining worldwide acceptance among businesses moving to the cloud.

Performance So Far

If we preview its recently declared fourth quarter 2013 results, decent growth is seen in all segments. It reported revenue of $6.68 billion as against $6.03 billion in the year-ago quarter, resulting in growth of 10.8% year over year and a sequential growth of 20.6%.

The product sales increased by 11.5% and sequential growth stepped up by 31.3%. Services recorded growth of 9.8% in the year-ago quarter and 6.4% sequential growth.

Revenue growth was mainly driven by its high-end storage business that rebounded in the fourth quarter, VMware and Pivotal.

EMC’s Stake in VMware

VMware is a pioneer in virtualization software and a subsidiary of EMC. EMC holds around 80% stake of VMware. VMware posted revenue growth of 16.5% on a year-over-year basis to a record $1.6 billion. This growth also contributed to the revenue and earnings of EMC.

A new company, Pivotal, was formed earlier last year 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). Pivotal was formed so that EMC can be more focused on cloud application, security applications system, and large scale data management systems. General Electric has also had planned an investment of $105 million in Pivotal to further assist its growth.

Global Growth

EMC continues to record global growth, and international revenues recorded $3.2 billion growth by 11% year over year.

Asia Pacific and Japan grew 1%, while Latin America revenue increased 12%, and a 15% rise was seen in the EMEA region. EMC's revenue grew 17% in the BRIC nations.

Journey Ahead

The company also plans to repurchase a total of $6 billion of shares by 2015 and this should have a positive effect on the EPS.

Looking at the growth trajectory of EMC, the company should be able at least to match its estimates going forward.

Moreover, its strategic investment in businesses such as XtremIO, ViPR and Pivotal should also help EMC in attaining revenue growth.

Competitors

NetApp is a company that provides IT-enabled business solutions such as data security, cloud solutions and data management systems. But looking at its recent performance, NetApp doesn't look very enticing.

In third quarter fiscal 2014, NetApp posted total revenue of $1.61 billion, a decrease of 1.2% from the year-ago quarter. Product revenues recorded $1.02 billion, a decrease of 4.3%

Also, NetApp is expensive at current levels. The company trades at a price-to-earnings multiple of almost 22x, 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.

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.


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