By Richard Saintvilus
With the second quarter underway, investors have received ample time to assess how some of the best tech companies on the market are performing. However, equally important, the market has gotten a glimpse of how corporations are allocating their enterprise budgets.
So far, with improved earnings, it seems IT spending has seen a slight rebound. The good news is, industry experts project that this will continue, especially since more companies are migrating their networks further into the cloud. To that end, here are a few Big Data titans that stand to benefit from this shift.
EMC (EMC) - Price Target $30
No real discussion about "big data" can occur without first mentioning EMC. There is no company that is better positioned to capitalize on the expected growth of this market. However, investors want to see much better performances from EMC to affirm the confidence that its valuations presumes. In the most recent quarter, the company delivered.
For the quarter, revenue arrived at $6 billion, or 8% growth year over year and roughly 14% sequentially - marking the company's first ever quarter reaching the $6 billion mark. Likewise, net income was solid; advancing 5% year over year to $870 million, or $0.39 per share. Digging deeper, the company did very well with a 6% growth in storage revenue, while product revenue advanced 5% year over year.
High-end product revenue really stood out, rising 6% year over year and 14% sequentially. This indicates how highly regarded EMC's superior technology is, that customers were yet willing to shell out the big bucks amid a tough spending environment. This also indicates that EMC remains a force within the sector and is gaining meaningful market share on rivals.
Given EMC's strong market position and solid fundamentals, this stock is trading well below its long-term potential. At 23.59 per share, the stock is trading at just 12-times fiscal 2013 estimates and 11-times 2014 estimate -- both of which are below EMC historical trading average. With solid free-cash-flow and continued market improvements, these shares should reach $30 by the second half of this year.
NetApp (NTAP) - Price Target $40
NetApp is another company that should be on investors' radar. As with EMC, the company continues to perform well despite market headwinds. In its most recent quarter, NetApp delivered 4% revenue growth, which also arrived 6% higher sequentially. Product revenue was down slightly by 18 basis points, but advanced 6.5% from the prior quarter.
It was clear that the company showed a focus on profitability and in particular, cost management. To that end, operating margins of 17.1% arrived better than management expected, helped by a drop in operating expenses. While NetApp deserves credit for this, I do wonder how long can it keep costs down and still work to grow market share.
In the meantime, recently rumblings about NetApp's competition should be over. Likewise, valuation concerns should be history. Even though NetApp still trades at a P/E 7 points higher than EMC, NetApp does not have to face significant margin pressure -- at least, not anymore, given that some rivals such as Dell (DELL) have begun to vanish. While this makes NetApp an intriguing buy opportunity, the company's now a compelling buyout candidate.
With the stock trading at $34, patient investors can be rewarded. It will be a surprise if NetApp remains an independent company beyond 2013. Cisco (CSCO) in particular, which has been on an acquisitions spree, should make a play here. For now, at current levels, the stock is certain to reach $40 by the second half of the year based on growing margin and free-cash flow.
Oracle (ORCL) - Price Target $40
Database giant Oracle didn't have an exceptionally strong quarter, with revenue arriving more than 4% below Street estimates. However, this performance does not take away from the company's solid market position and long-term value. Management blamed it on poor sales execution. Plus, Oracle is not known to have strong third-quarter performances.
Nevertheless, the company needs to do better. For Oracle, the weak sales execution means that revenue is being pushed out farther than expected. It's not a signal of lost market share. And investors should expect these sales delays to be closed in the Q4 report. Besides, the slowing sales didn't impact profitability.
Net income arrived at $2.5 billion, or $0.52 per share. Excluding items, earnings rose to $0.65 per share. I'm positive about Oracle's prospects for the next quarter, especially since corporate enterprises will have more clarity about government spending.
With 2013 earnings estimates being $2.69 per share, the stock is now trading at a P/E of just 12, or 6 below the S&P 500 average of stocks in Oracle's category. In a market where stocks often take off and never look back, Oracle is now giving opportunistic investors a second chance to buy.