EMC's Enviable Encore

It's good to be EMC (NYSE: EMC  ) these days. The maker of storage devices and related software delivered another outstanding quarter yesterday, growing revenue by 33% over the same period last year and 5% sequentially. Net income also rose 136% to $193 million from $82 million during last year's second quarter. And there are no signs of slowing: EMC anticipates $8.1 billion in sales this year but has booked only $3.8 billion thus far.

The results prove that EMC has done better than effect a complete turnaround. It has become one of the dominant vendors of storage hardware and software, on par with heavies such as Hewlett-Packard (NYSE: HPQ  ) , Hitachi (NYSE: HIT  ) , and IBM (NYSE: IBM  ) . Just look at the numbers. Researcher IDC says EMC widened its leads in the markets for storage management software and external disk storage systems in the first quarter by roughly 3% each.

There's no question that EMC's strategic acquisitions have helped considerably. But it's becoming increasingly clear that acquisitions are only part of the growth story. This quarter, for example, EMC once again teamed with longtime partner Dell (Nasdaq: DELL  ) to introduce a lower-cost storage networking device for smaller businesses. The firm also hopped on the Chinese bandwagon, inking a deal to OEM storage systems to Langchao Electronic Information Industry, a leading server vendor there.

Of course, there are also some big problems with EMC. For one, it trades for more than 42 times trailing earnings, well above the market's multiple of roughly 23. That's pricey.

Ask yourself: Do you think EMC can grow its income by more than 40% annually over the next three years? The firm would have to nearly triple its projected 2004 earnings of $825 million to meet that goal, and that would likely require selling more than $22 billion in hardware and software. If you're suddenly thinking that's unlikely, you're probably right. After all, the long-term growth rate for the storage hardware market is projected to be 7%. (Software will be higher, but it's a smaller market.)

And then there's share dilution. EMC is one of the worst offenders when it comes to stock options. Go back to that net income number. Although total income grew by 136%, diluted earnings per share only doubled, to $0.08 from $0.04. Why? Because EMC's year-over-year share count grew by almost 11%. Ouch.

I admit it: I really want to invest in EMC. It's a great, growing business. But how can I plunk down money for shares when management has a history of taking profits from existing owners? Answer: I can't.

Forget these crazy tech stocks. Get paid to invest. Give Mathew Emmert'sMotley Fool Income Investora try. You can test drive it risk-free for 30 days.

Fool contributor Tim Beyers is tired of beating up on tech stocks, because he loves technology. Tim owns stake in any of the firms mentioned, and you can view his Fool profile here.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 509399, ~/Articles/ArticleHandler.aspx, 10/21/2016 9:26:23 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 12 hours ago Sponsored by:
DOW 18,162.35 -40.27 0.00%
S&P 500 2,141.34 -2.95 0.00%
NASD 5,241.83 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
DELL.DL $0.00 Down +0.00 +0.00%
Dell CAPS Rating: *
EMC $0.00 Down +0.00 +0.00%
EMC CAPS Rating: ****
HPQ $14.10 Down +0.00 +0.00%
HP CAPS Rating: ***
HTHIY $50.37 Down +0.00 +0.00%
Hitachi, Ltd. (ADR… CAPS Rating: *****
IBM $151.52 Down +0.00 +0.00%
IBM CAPS Rating: ****