Tickers in this Article: EMC, VMW, NTAP, HPQ, DELL, IBM, ORCL
With another quarter in the books, it is pretty clear that "Big Data" is still a good place to be in the tech space - and that EMC (NYSE:EMC) is still the 800 pound gorilla. While there may be some legitimacy to the idea that EMC is at risk of someday getting "Cisco-ed" (Nasdaq:CSCO) by upstart rivals, that looks to be a long-term risk. For the here and now, EMC remains one of the more compelling ideas among established tech names.

TUTORIAL: Stock Picking Strategies

Another Strong Quarter In The Books
EMC logged 20% annual revenue growth for the second quarter; a result that did not significantly exceed analyst expectations. The company reported that the info storage business saw about 19% growth, with high-end sales (led by Symmetrix) up 15% and mid-tier up 27% on strength from Isilon and VNX/VNXe sales. Encouragingly, revenue growth was still on the order of 17% after backing out VMware's (NYSE:VMW) contributions.

Profit performance was solid in the second quarter, but EMC will need to do a little more work here in the coming quarters. GAAP gross margin improved about 80 basis points and operating income rose about 27% from the year-ago period. EMC does not have poor operating margins per se, but the company's operating margins and returns on capital are not standouts in the tech world today. (For more, see Analyzing Operating Margins.)

Competition And The Growing Market
Looking at EMC's segment growth, it looks like the company may indeed be succeeding at taking some share from NetApp (Nasdaq:NTAP) in that mid-tier space. At the same time, perhaps the company is losing some traction at the high end - other tech companies that have already reported earnings (including VMware and IBM (NYSE:IBM)) have indicated that enterprise spending on data is pretty healthy, so the discrepancy within EMC's units is interesting.

All of that said, it just does not look like Hewlett-Packard (NYSE:HPQ) or Dell (Nasdaq:DELL) are making the sort of headway that should trouble an EMC investor. It's inevitable that there will be some turbulence from time to time, but it looks like EMC's biggest concerns are NetApp and the potential of really radical change in the storage market.

Looking at the bigger picture, though, the data storage market seems healthy and likely to stay strong for a while. Not only are companies like Oracle (Nasdaq:ORCL) and Microsoft (Nasdaq:MSFT) both encouraging and facilitating companies in gathering, analyzing and storing more data than ever before, cloud computing is creating even more need for powerful storage equipment. (For related reading, see A Primer On Investing In The Tech Industry.)

The Bottom Line
Admittedly there has been a bit more life lately in "old tech" names like Microsoft, Oracle, and IBM, but EMC still stands out as an appealing mix of growth and value. The company's low return on capital is a risk - a market share leader in a growing tech category should do better - but not one that is likely to trouble investors so long as this industry transformation is still underway.

Investors more interested in playing the up-and-comer angle should consider NetApp and can take some encouragement from the notion that there are likely to be multiple winners in storage. Investors more interested in a solid GARP name with a great amalgamation of growth, valuation and market share should take a serious look at EMC shares at today's prices. (The GARP strategy is a combination of both value and growth investing. For more, see Stock-Picking Strategies: GARP Investing.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center