Thursday's Top Upgrades (and Downgrades)

Analyst places bets on data storage companies EMC, Nimble Storage, and Violin Memory.

Mar 13, 2014 at 1:29PM

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense and which ones investors should act on. Today, we'll look at why one analyst has just recommended data storage specialist EMC (NYSE:EMC) and made a couple of other recommendations in the storage space -- neither of which you've ever heard of. Let's start off with the headline name, though:

EMC = cheap, squared
Shares of EMC are defying the downturn on stock markets today, up a good half a percentage point in response to a new buy rating from Wunderlich Securities. Citing EMC's strong position in four tech "megatrends," storage, virtualization, security, and analytics, and its robust market share, Wunderlich argues that "the stock is undervalued" and should be bought.

And Wunderlich is right. EMC is undervalued -- whether it looks that way or not.

I'll admit that, priced north of 20 times earnings but expected to grow these earnings at only about 12% annually over the next five years, EMC is not an obvious value candidate. But looks can be deceiving. The fact is that, with $6 billion in annual free cash flow, EMC actually earns about twice as much cash profit as it reports for its "net income" under GAAP accounting standards. Result: At a price-to-free cash flow ratio of just 9.2 (and an enterprise value-to-FCF ratio that's even lower), EMC actually is very cheap for its growth rate.

Add in a tidy 1.5% dividend yield for good measure, and Wunderlich is exactly right to recommend buying EMC. But what about the other two stocks that Wunderlich initiated coverage on today -- the stocks you've never heard of? What about...

Violin Memory (NYSE:VMEM)
Like EMC, a company in the data storage business, but unlike EMC in that it's been public less than a year and has a much smaller market capitalization, Violin Memory is volatile enough that it's reacting strongly to Wunderlich's endorsement today. Describing the company as a participant in the "large and growing market for enterprise solid state systems," and praising CEO Kevin DeNuccio as an executive with a "track record for transforming businesses," Wunderlich argues that Violin has been unfairly punished by investors for missing "revenue estimates" in its first couple of quarters as a public company.

Wunderlich thinks the shares, which currently trade for $4 and change, are worth closer to $6. But personally, I'm not so sure about that. Unprofitable for its entire history, and a perpetual cash burner, I think that "revenue estimates" are the least of Violin's problems. Its real problem is that it's not making money on the revenue it does have.

What's more, given that very profitable EMC shares can be bought for just 2.4 times annual sales, I see no reason why investors should pay 3.3 times Violin's unprofitable sales for its shares. Rather, I'd stick with quality -- and ignore Wunderlich's second recommendation.

Nimble Storage (NYSE:NMBL)
Last and least, we come to Nimble Storage, another recent IPO -- but one Wunderlich is less enthusiastic about. While bigger than Violin, Nimble shares are reacting just as violently to the analyst's negative note (Wunderlich rated this one only a hold, calling its valuation "lofty") as Violin reacted to the analyst's positive note.

As relayed by this morning, Wunderlich actually likes the fact that Nimble is "gaining traction" in the storage market on the strength of its "state-of-the-art technology," "strong channel distribution," and "solid product monitoring technology and customer support system." Wunderlich believes the company will gain market share going forward.

The problem with Nimble, quite simply, is the price, which Wunderlich puts at "10x calendar-year 2015 sales" and believes is too high for investors to safely buy.

As for me, I don't know what kind of sales numbers Nimble will produce two years from now (psst! Wunderlich doesn't, either). What I do know is that right now, today, Nimble is every bit as unprofitable as Violin; that it's burning cash like mad; and that it pays no dividend. It's also selling for 16.5 times the annual sales we know it can achieve (because it's already reported them), which makes the stock about seven times more expensive than EMC on that metric.

Long story short, I'm with Wunderlich on this one. As long as EMC is out there, profitable, growing, and paying a dividend, I see no need to invest in a second-class storage stock like Nimble.

Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of EMC.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers