- EMC's shares have taken a hit of late due to the company's weak earnings guidance.
- But EMC should improve in the future on the back of growth in big data and software-defined networking.
- EMC's fundamentals are also strong, and coupled with a strong dividend yield, it could be a good buy on the pullback.
Cloud solutions provider EMC (NYSE:EMC) had started the year on a positive note, but the company's performance has waned off in the past month. When EMC released its first-quarter earnings, it projected a weak earnings performance for fiscal 2014. EMC expects to earn $1.90 per share this year, behind analysts' estimates of $1.94. Also, EMC's earnings in the first quarter dropped to $392 million from $580 million a year earlier.
The company is facing some short-term headwinds, which is why its performance is expected to decline. As reported by Bloomberg --
"Some businesses are slowing purchases, particularly of high-end storage machines, and EMC is trying to focus more attention on middle-tier products as well as newer initiatives such as replacing storage machines with software. The company in January provided a lower-than-expected forecast and said it would take a charge tied to eliminating 1,000 jobs."
Looking beyond the short-term headwinds
However, investors should think of making the most of EMC's drop as the company looks well-positioned for the long run as demand for storage is expected to grow. EMC is trying to build a strong storage backlog and grow storage bookings at a faster rate than storage revenue.
EMC's strategy is aimed at helping customers transition to a new IT platform and to help them transform into more agile software-defined enterprises. And while its customers are undergoing this IT and business transformation, EMC is providing them more automation, more flexibility, and lower operating cost for the current platform of IT systems on which they currently run a vast majority of their business. This move on EMC's part should help it in customer retention and also gain more customers driven by its focus on providing strong service.
In mobile, EMC is helping customers empower their mobile workforce with enterprise mobile management and mobile security. In cloud computing, it's providing customers with a software abstraction and automation layer of technology across their compute, network, and storage resources. This software-defined data center approach should help customers form a very efficient private cloud that works seamlessly with a wide choice of compatible public clouds.
Targeting software-defined networking
EMC has implemented a unique and powerful federated operating model to maximize its focus, assure strategic alignment, and capture the massive opportunities that will open up in its transition to the new IT platform. In its federated model, EMC subsidiary VMware (NYSE:VMW) will take the lead in providing an enterprise/solution for empowering the mobile workforce. EMC Information Infrastructure, or EMC II, will partner very closely with VMware and provide information storage capabilities that meet the required needs for speed, robustness and the cost for this opportunity.
The company has identified the priority of its customers, which is to drive competitive advantage by using mobile, social, cloud, and Big Data. Also, VMware is in the early stages of a huge opportunity for building out software-defined data centers, improve the end-user compute experience, and adding seamless connections to external clouds via vCHS.
Software-defined networking is a big opportunity for EMC as the market is expected to grow at a rapid rate in the future. According to TechNavio --
"Analysts forecast the Global Software-defined Networking market to grow at a CAGR of 62.3 percent over the period 2013-2018. One of the key factors contributing to this market growth is the acceleration of cloud computing. The Global Software-defined Networking market has also been witnessing the increasing divestments from traditional networking solutions."
Fundamentals and conclusion
EMC is primed to profit from trends in big data with its different strategies. In addition, EMC's valuation also makes it an enticing pick. Its trailing P/E and forward P/E ratios are 20.87 and 12.26, respectively. This indicates that EMC's earnings are expected to grow going forward. A look at analyst estimates will also reveal the same, with EMC's earnings expected to grow at an annual rate of 10.90% for the next 5 years.
Also, EMC is good at paying dividends. Its board announced an increase of 15% in the quarterly dividend, taking its dividend yield to 1.80%. EMC looks set to benefit from Big Data and its fundamentals are also looking strong. So, the recent pullback in its share price is a good opportunity for investors to buy more shares.
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.