Bullish On EMC For Core Business And VMware

As the amount of data stored for both personal and business use continues to grow almost on a daily basis, the demand for data storage systems as well as reliable backup solutions remains strong. Data storage systems consisting of an array of drives are used by businesses that store large amounts of data on their servers. Data storage is one of the most profitable areas in the traditionally low margin hardware sector and EMC is the leading data storage provider with a 22% share of the enterprise market.

Beyond the data storage business, the reason I am interested in EMC is because of a subsidiary of EMC called VMware that was acquired by EMC in 2004 for $635 million. VMware sells virtualization software that allows companies to run multiple "virtual" machines on a single server or on distributed hardware. Virtualization allows companies to utilize hardware more effectively and this is something that is very appealing to power conscious large enterprises. AMD took market share from Intel primarily because of its power efficient line of server chips last year (if you live in the San Francisco bay area, you may have seen the huge AMD billboard on highway 101 advertising this fact).

Beyond hardware efficiency, VMware also allows companies to rapidly deploy and easily maintain these virtual machines. VMware is expected to have sales of over $1 billion this year and is sometimes referred to as the fastest growing software company on the planet.

EMC has decided unlock value in its VMware subsidiary by deciding to file an IPO for VMware this summer, representing 10% of its stake in VMware. EMC's IPO of VMWare could be valued anywhere between $600 million to $1 billion, giving VMware a valuation of between $6 billion to $10 billion. This is more than 10 times what EMC paid for VMware just three years ago and represents close to one third of EMC's $29.2 billion market cap.

The stock has already bounced strongly off its July 2006 low of $9.44 and is up 46.72% since then but has hardly done anything over the last five years despite consistently growing both revenues and earnings. Based on this IPO, the growing data storage business, a low forward P/E of 17.76 and a strong balance sheet, I believe that EMC represents a good opportunity at these levels.

I am adding 600 shares of EMC to the SINLetter model portfolio and plan to start a position in my personal portfolio as well.