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Buy, Sell, or Hold: EMC

By Selena Maranjian - Dec 31, 2012 at 5:00PM

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Does the great potential here outweigh the risk? It sure looks like it.

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at EMC (EMC) today, and see why you might want to buy, sell, or hold it.

Founded  in 1979 and based in Massachusetts, EMC is a giant in the electronic storage business, offering storage systems and software to industry and the business world, along with other virtual and information infrastructure offerings. One of the company's first milestones  was developing 64-kilobyte chip memory boards in 1981. In 1985, it was the first to ship memory upgrades using 1 megabit random access memory (RAM). EMC's market capitalization tops $50 billion, and over the past year, its stock has gained 15%. Though its average annual gain over the past few years has been in the single digits, it has averaged 15% over the past decade and a solid 19% over the past 20 years.

Have you heard about cloud computing and "big data," and how they're expected to grow rapidly? Well, those are two reasons to be interested in EMC, as it's involved in both. The company explains, "Information growth is explosive, with data volumes set to multiply 44 times by 2020. This is driving two major trends in IT: Cloud and Big Data." Some see the cloud-computing market surpassing $240 billion by 2020.

Another big plus is virtualization specialist VMware (VMW 2.84%), which is a powerhouse in the cloud arena, and is 80%-owned by EMC. Its five-year average annual revenue and earnings growth rates top 25 %, and its net profit margin has recently been in the high teens . Among other attractions, both VMware and EMC are appealing to smaller and more dynamic businesses with their offerings, as they give these companies more flexibility. VMware has benefited from a strategic partnership with Cisco Systems (CSCO 2.73%), offering customers bundled servies.

The company is growing briskly, with revenue growth accelerating and averaging 14%  over the past three years, and earnings growth averaging more than 30% annually. While past growth is great, future growth is what matters now, and EMC has been busy expanding into promising areas such as flash storage. Its growth rate may pick up more once the global economic recovery heats up and companies that have been holding back their spending start loosening their purse strings. The weakness in technology spending in recent years has been hurting companies such as EMC. For example, NetApp (NTAP 3.02%), another storage specialist, is down about 10% over the past year, as it deals with tough competition.

EMC's valuation is another draw, with its recent price-to-earnings (P/E) ratio near 20  and its forward P/E about 13. Last month, my colleague Rich Smith was "positively giddy" over the company's price.

Like most companies, EMC has competition. Not only from other storage specialists but also from big technology companies, some of which can threaten EMC by building out their own storage-solution offerings to make themselves more full service.

Next, while many companies like the flexible services offered by EMC and VMware, there's a downside. When EMC and VMware don't lock in these customers in more rigid arrangements, the customers' switching costs are lower  and the threat of competition looms larger.

If you want a dividend, you're out of luck with EMC -- at least for now. That's a shame, as the company does have billions in cash and free cash flow, and other big and growing tech companies are offering payouts. Intel (INTC 3.21%), for example, sports a 4.4% dividend yield, while Cisco Systems recently yielded 2.9%, IBM (IBM 2.62%) yielded 1.8%, Microsoft (MSFT 3.42%) yielded 3.5%, and even Apple (AAPL 2.45%) has a 2.1% payout. It won't be surprising if EMC initiates a dividend in the near future. Still, growing piles of cash do have their advantages, giving companies the ability to make big acquisitions, for example.

Hold (off)
Given the reasons to buy or sell EMC, it's not unreasonable to decide to just hold off on it. You might want to wait for technology spending to pick up more, as that will boost EMC's bottom line. You might wait for an even more attractive entry point, if the stock falls some -- though that's taking a risk, as sometimes you miss your chance that way.

You might also check out some other interesting technology or storage companies, to see if they seem like better bargains than EMC. Perhaps take a look at Fusion-io (FIO.DL), which is a smaller enterprise storage company focused on technologies such as flash memory and solid-state drives. It already serves some rather major customers, such as Apple and Facebook (META 7.19%).

The verdict
I'm holding off on EMC for now, but I'm still thinking about it, and it might end up in my portfolio in the near future. Everyone's investment calculations are different, though. Do your own digging and see what you think. The company may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.

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Intel Corporation Stock Quote
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Dell EMC Stock Quote
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VMware, Inc. Stock Quote
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NetApp, Inc. Stock Quote
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$66.81 (3.02%) $1.96
Fusion-io, Inc. Stock Quote
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*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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