EMC Earns Enough

Ask any of those among our 82,000-strong CAPS community who have rated EMC (NYSE: EMC  ) whether the data storage specialist is undervalued, and chances are you'll get an enthusiastic answer. Behold:



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Data current as of Jan. 29.

And yet this crowd could be measurably larger by this afternoon. Earlier today, EMC reported fourth-quarter and full-year results that, once again, look outstanding. Let's review.

For the fourth quarter, revenue was up 19% to $3.83 billion. Non-GAAP per-share net income -- that is, earnings excluding the effects of one-time charges and stock-based compensation -- was up 25%. GAAP earnings were up 33%.

For the full year, EMC improved sales by 19% and non-GAAP per-share earnings grew by 26.4%. Better still, gross margin was up 1.5 percentage points to 54.5%.

VMware (NYSE: VMW  ) , which is more than 80% owned by EMC, deserves thanks for a portion of the gains. The storage and systems virtualization specialist realized an 80% top-line gain in Q4. Roughly 13% of EMC's non-GAAP per-share earnings -- for the quarter and the year -- were derived from VMWare.

Therein lies the hope for EMC investors. Only 5% of the market for virtualization software is yet penetrated. If VMWare can fend off the likes of Microsoft (Nasdaq: MSFT  ) , Cisco (Nasdaq: CSCO  ) , and Red Hat (NYSE: RHT  ) and maintain a leadership position in the space, EMC investors will sow the rewards.

But that day could still be years away. Management's initial guidance for 2008 calls for 50% revenue growth in the VMware business and -- wait for it -- 9% growth in its core information infrastructure unit, which accounted for 90% of revenue in 2007. Not exactly the stuff of a growth stock, is it?

Nope, but that doesn't mean EMC is expensive. If we take management at its word, EMC today trades for roughly 15 times its $1.04 in projected 2008 non-GAAP net income. That's at worst reasonable, but it may prove cheap -- if, that is, you believe VMWare can fend off its well-financed competitors.

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