May 26, 2011
Investors watching trends in IT would be wise to focus their attention on EMC (NYSE: EMC ) . The company focuses on networked storage, which is an area seeing explosive growth rates. How quickly is data storage growing? The Economist estimates that the growth rate of information created is growing at a 60% compounded rate! As EMC proudly points out itself, information is expected to grow 44 times over the next 10 years.
Of course, advancing amounts of data don't automatically mean gains for all companies involved. For example, just because processing power is expected to double over the next two years, Intel isn't expected to see sales double. The relentless beat of innovation means that companies will decrease the cost of storing data as more data is created. Still, EMC holds some key advantages in the storage industry that should see its growth rates easily surpass large technology peers.
Here are several positive and negative trends to watch at EMC in the coming months and years.
What to watch for: The good
- EMC realized the value of virtualization early on and purchased leader VMware (NYSE: VMW ) for about $625 million in late 2003. EMC's a well-managed company, and it realized that the hardware portions of storage can become easily commoditized, but software can create a long-lasting differentiation point. In the case of VMware, purchasing the software that provides virtualization proved well-founded; today VMware is worth nearly 65 times EMC's purchase price! EMC still owns 80% of VMware today, meaning the at-market value of EMC's VMware stake constitutes $33 billion. For comparison, EMC as an entire enterprise is worth $57 billion.
- EMC has been extremely adept at filling product holes with timely acquisitions. Last fall, I was able to visit scale-out storage specialist Isilon's headquarters and talk to the company about its ambitions in the storage market. I came away very impressed; their solution for storing "unstructured data" made complete sense, especially with more and more data moving toward unstructured forms like videos or power point presentations. However, I was unsure of their ability to sell their product to stodgy IT firms that might be unfamiliar with a new, seemingly revolutionary kind of storage. However, EMC eventually bought Isilon. While the deal might have struck some as overpaying, I see Isilon as a key storage centerpiece that can create outsized opportunities for EMC as the storage industry continues morphing. Whereas Hewlett-Packard (NYSE: HPQ ) and Dell (Nasdaq: DELL ) had to engage in a wild bidding war over 3Par in large part because they had underinvested in storage research and development, EMC is filling logical holes in its portfolio that should leave the company primed to continue growing strongly across the next half-decade. EMC can immediately put its world-class sales force to work selling Isilon products, and the deal should only expand the company's leadership in storage.
What to watch for: The bad
- One of the main fears surrounding EMC is its investment in VMware. The main product within virtualization, hypervisors, are becoming commoditized thanks to companies like Citrix (Nasdaq: CTXS ) that give hypervisors away for free and look to gain revenue through support contracts. Even worse, switching costs for basic virtualization functions are low. While VMware hopes to mitigate this threat through more advanced features, VMware's ability to continue holding an enterprise market share pegged as high as 80% is in question.
- Another question mark for EMC is its relationship with large vendors like Hewlett-Packard and Dell. As these companies look to become more all-inclusive service companies like IBM, they've tried pushing their own storage solutions. Thus far, EMC's vast technological advantage and world-class sales force have been able to keep encroachments at bay. However, in the future, EMC could fall under increasing threats. For example, numerous reports place Oracle (Nasdaq: ORCL ) as one company that's interested in increasing its storage presence. Aside from generalist-IT firms, EMC also faces competition from storage specialist NetApp (Nasdaq: NTAP ) , a company that has shown continuing storage growth rates that exceed the industry leader in recent years.
Thanks to its ownership in VMware and smart acquisitions, EMC looks to continue its leadership atop the storage industry. However, like all technology, the industry is always in motion, and the best way to stay ahead of the opportunities and threats facing EMC is to keep up with the news surrounding the company. The Motley Fool recently introduced a free My Watchlist feature that allows users to stay ahead of the curve and receive up-to-date news on companies like EMC, or any of its competitors. To get recent EMC news and analysis, add the company to your watchlist today: