I have followed EMC (EMC) since the early 1990s and I can't remember a time when this company wasn't the class act in the storage business. Ever since the founders stuck a few hard drives in a wooden cabinet, EMC has been the leader in this space. Nowadays, as far as this sector is concerned, the rage among investors is cloud storage -- and EMC is leading the charge. But with sales in the high-end segment of the storage business flat, is the outlook for EMC shares cloudy?
Two weeks ago, research firm IDC said the high-end storage business (i.e., with average selling price of more than $250,000) had gone flat year over year and was off 13% sequentially, as customers were busy digesting equipment from earlier binges. IDC doesn't expect the business to get any better any time soon, either. But, fortunately, there are lots of different segments of the storage business that continue to grow. Mid-range systems, for example, continue to climb in the double digits.
In the first quarter, EMC posted revenue growth of 14.4%, making this quarter its ninth straight showing double-digit growth. After the market close, management reiterated its goal of reaching $28 billion in revenue by 2014.
In the last year, EMC shares have lagged the S&P 500 by about 10%. Investors, freaked out by the economic mess in Europe, seem to be punishing the stock. But recently the company announced a record 42 new products designed to attack the low, mid- and high end of the storage business. The product refresh was the first major hardware overhaul since 2009.
Over the next year, as all these new products make their way into customer accounts, I would expect EMC to post continued strong results, led by higher gross margins and market share gains. EMC's robust product roadmap and powerful software makes an unbeatable combination.
For example, EMC is taking market share from NetApp (NTAP) because that company bet that customers would focus on the cost of their storage devices. But EMC gave customers an upgrade path and powerful software that allows customers to tie those inexpensive systems to larger, more powerful ones. EMC figured customers would place a greater value on their data than on hardware, so upgrades, reliability and the ability to upgrade to better equipment became a major selling point.
To me, this is a good time to buy EMC. The stock is cheap at 12x 2013 estimates of $2, especially after that huge product launch. Sooner than you think, EMC's legendary sales force will be hitting the pavement, selling those new devices. Trailing gross margins of 62% and operating margins of 18% should get a boost from all the new products. To me, EMC should be worth at least $30 a share once investors stop punishing the stock for the economic mess in Europe. When the clouds lift from EMC, investors should be able to store up some nice gains.