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David Rolfe Comments on EMC

January 27, 2014 | About:
EMC (NYSE:EMC)’s stock was flat over the course of 2013.  In fact, the stock has been flat over the past three years – sigificantly underperforming the near 50% gain in the S&P 500 Index.  The stock has been buffetted over fears that the Company’s current decelerated growth is in secular decline due to a number of competitive threats.  The first threat is that flash storage and software-defined storage will cannibalize traditional hard disk drives.  Two, the public cloud is only a threat (and not an opportunity) that disintermediates information technology (IT) spend from both EMC and VMware (EMC maintains an over 80% ownership stake in VMW).  Third, VMware’s entrenched vSphere gets displaced by Open-Source and Microsoft’s Hyper-V.  Fourth, recent premium-priced acquisitions of Data Domain and Isilon are evidence of lack of internal product development.

EMC’s products – both hardware and software - are litearlly a geek’s wonderland alphabet soup, which include Storage Area Network (SAN), Network Attached Storage (NAS), Direct Attached Storage (DAS), Virtual SAN, All-Flash XtremIO, Atmos, Avamar,  Data Domain, Isilon, Pivotal, ViPR Software Defined Storgae, VMAX, VNX, VNXe, VPLEX, VSPEX (none of these are typos).  Information storage makes up 70% of revenues and virtualization 23% of revenues.  Products generate 55% of revenues.  Services generate 45% of revenues.  The Company’s gross profit split is approximaltey 67% data storage and 31% virtualization.

The bear case on the Company has been so relentless as to render EMC a “broken growth company.”  Indeed, the stock’s forward P/E is just 11.5X.  In addition, if you exclude the Company’s 80% stake in VMware ($30 billion – cost of all of VMW in 2003 just $635 million) and net cash ($8.5 billion), the remaining EMC business “stub” is valued at only 4-5X earnings.  Mr. Market has thus concluded the Company’s entrenched ecosystem; sticky customers and unparalleled distribution (direct sales force) are of little value.  In addition, such an undemanding valuation assumes further that the Company’s key new products such as Pivotal (“the Android operating system of cloud computing”), XtremeIO and ViPR will never ramp-up quickly in the hundreds of millions of dollars.  On the contrary, we expect EMC to post consolidated revenue growth in the mid-to-high single digits, with modestly expanding margins – mostly thanks to VMware’s relentless push deeper into data center virtualization and automation.  Further, the stock’s attractiveness has not gone unnoticed as the Company recently announced a new dividend and multibillion stock buyback.  These factors should combine to generate the double-digit bottom-line growth we expect over the next few years.  In our view the stock’s downside over the next year or so is just -10%, while the prospective upside to fair vale is +33%.  


From David Rolfe (Trades, Portfolio)’s Wedgewood Partners Fourth Quarter 2013 Commentary.

Rating: 4.0/5 (1 vote)


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