Steady Growth, Market Position, And A Repurchase Plan Make EMC A Buy

| About: Dell Technologies (DVMT)

[[EMC]] is among the leaders in data storage solutions. It also provides various other solutions such as data warehousing, business intelligence, virtualization, etc. Some of its products such as EMC Atmos, Vblock, Mozy, Syncplicity are gaining worldwide acceptance among businesses moving to the cloud

Performance so far

If we look at the recently declared second-quarter results, decent growth is seen. It reported revenue of $5.61 billion, a 6% year over year increase. EMC's domestic revenue of $3 billion rose by 4% and it contributes to 53% of the total revenue.

Internationally, EMC saw higher revenue growth of 8%, amounting to $2.7 billion. Revenue growth was mainly driven by its information infrastructure business, pivotal and VMware (NYSE:VMW).

VMware is a pioneer in virtualization software and a subsidiary of EMC. EMC holds around 80% stake of VMware.

VMware posted revenue growth of 11% in its latest quarter from the year ago period and registered an income of $244 million, a 28% jump. This growth also contributed to the revenue and earnings of EMC.

A new company, Pivotal, was formed earlier this year as an amalgamation of various divisions and products from EMC and VMware. Pivotal's product portfolio will have Pivotal Labs, Cloud Foundry, Greenplum, Gem Fire, Cetas, Greenplum and Vfabix Suit (product of VMware). Pivotal was formed so that EMC can be more focused on cloud application, security applications system, and large scale data management systems.

General Electric (NYSE:GE) has also announced an investment of $105 million in Pivotal to further assist its growth.

Global growth

EMC has been recording global growth as its revenue grew in various regions compared with the second quarter last year. Asia Pacific and Latin America grew 12%, while North American revenue increased 4%, and a 6% rise was seen in the EMEA region. EMC's revenue grew 18% in the BRIC nations.

Looking ahead

EMC projects total revenue of $23.5 billion for fiscal 2013 and is expecting a rise of 25.5% rise in non-GAAP operating margin. Also, Non-GAAP net income of $4 billion is expected for fiscal 2013. It expects cash flow of $6.8 billion from operating activities, and the free cash flow target is $5.5 billion.

The company also plans to repurchase a total of $6 billion worth of shares by 2015 and this should have a positive effect on the EPS.

Looking at the growth trajectory of EMC, the company should be able to at least match its estimates going forward.

Moreover, its strategic investment in businesses such as XtremIO, ViPR and Pivotal should also help EMC in attaining its targets.


NetApp (NASDAQ:NTAP) is a company that provides IT-enabled business solutions such as data security, cloud solutions, and data management systems. But looking at its recent performance, NetApp doesn't look very enticing.

In the fourth quarter, NetApp posted total revenue of $1.71 billion, a rise of just 0.8% from the year-ago quarter. Its operating expense also increased 7.7% to $827.8 million from the year-ago quarter, which had an impact on its earnings which decreased 7.7% to $204.4 million. NetApp's operating margin also declined to 11.9% as compared to 13% in the year ago quarter.

Also, NetApp is very expensive at current levels. The company trades at a price-to-earnings multiple of almost 29x, while in comparison, EMC trades at a trailing P/E of 20. With quarterly revenue growth slowing down and earnings dropping, the valuation looks rich and investors are advised to stay away from NetApp.

Brocade Communications (NASDAQ:BRCD) is another company that provides solutions similar to EMC, but it is a smaller player. Brocade earns 50% of its total revenue from its core service of storage area networks (NYSE:SAN). However, it faced a 7% decline in revenue in the second quarter from the prior year period. This can be concerning for investors. With major players like Cisco (NASDAQ:CSCO), Brocade faces fierce competition for its core business and the company might be in for tough times.

It looks like the company's management is aware of this and that's why they have been selling shares. Wall Tyler, a vice president at Brocade, recently sold around 97,000 shares. Given the recent revenue decline and probability of stiff competition, it is not surprising that an insider sold shares.


EMC's stake in VMware and the constant adoption of the cloud are expected to drive its growth in the future. Moreover, as seen above, the company is cheaper than peers such as NetApp and has a lucrative share repurchase plan in place. So, investors should consider putting their money in this stock if they are looking for a play on the cloud.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.