EMC to Vault the Profits

 | Mar 19, 2012 | 11:00 AM EDT
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There's an old adage on Wall Street that says, the Street is in the "moving business, not the storage business." But one company has been proving the storage business -- or, at least, the data-storage business -- is better: EMC (EMC). Shares of the company have been shooting higher amid complete decimation of the competition, and the market for data storage is growing like crazy. Can EMC store up more profits?

On Monday research firm IDC released results from its first ever "Big Data" survey, in which it looked at systems capable of collecting, storing and transferring over 100 TB (that's terabytes) of data. These monster systems are not about data "at rest," sitting all alone in a data warehouse and hopefully to be used one day. The survey was about data sets that were in constant motion: Streaming data, like movie data, ecommerce and cloud computing data, or social-network data. It was about gigantic systems that could store, transfer, and crunch multiple formats of data.

The Big Data market, as defined by IDC, includes servers, storage, networks and software. According to the researchers, the market was worth approximately $3.2 billion in 2010 and is expected to grow at compound annual growth rate of 39.4% over the proceeding five years, to reach $16.9 billion by 2015. IDC believes this particular subset of the information-technology market is growing at 5x the overall IT market. Given that growth rate, vendors are sure to hype their products that address the Big Data market. 

While most of the opportunity in the Big Data market is in services and software, it's hardware that makes up the fastest-growing part of the market. In fact, IDC believes that storage hardware will grow at a 61.4% compounded rate through 2015. 

One vendor that is perfectly positioned in the Big Data market is EMC. When I started following this company in the early 1990s, I would drop by headquarters in Hopkinton, Mass., and the parking lot looked like a Lamborghini dealership. The high-testosterone sales culture at EMC pushed data storage as static -- storage was a place where retailers could stash their cash-register receipts, and hospitals could store their patient's records.

But today, data are dynamic. Customers need high-performance storage systems to serve up data to millions of end users who want to stream movies off the Internet or on their 4G tablets. Companies want to downsize their IT departments, move the data into the cloud and make their workforce mobile. Tablets and smartphones are enabling a whole new market for data storage.

As the No. 1 vendor in the global disk-storage market (with 22% market share), EMC continues to grow at a breakneck pace. In fiscal year 2011, revenue grew 18% from the prior year, another double-digit growth year is expecte in 2012. Last year, margins rebounded to 61% from 53% in 2010 due to a greater contribution from higher-margin software sales.

Further, with its VNX family of mid-and low tier storage systems, EMC is finally putting the screws to its long time nemesis NetApp (NTAP). Execution mishaps and market-share erosion have led NetApp down the path of slower revenue growth and lower gross margins. Many analysts cut NetApp's revenue growth estimate for fiscal 2013 to the high single-digits (8% to 9%). Ouchy!

Recently, EMC has caught a few downgrades because of valuation. But, to me, the risk of getting too caught up in valuation outweighs the risk of missing these powerful trends. IDC just bumped up its global 2012 tablet forecast to 106 million units. Tablets and smartphones are ideally suited to take down this dynamic data that EMC is serving up. I believe EMC will be storing up profits for a long time to come.

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