International Data Corporation (IDC) recently released its first quarter report on disk storage systems. The data showed that worldwide storage systems factory sales reached $6 billion. This is an increase of 7.1% compared to the same period last year. It also said that the total disk storage systems market generated approximately $8 billion, implying a 6.8% growth year on year. Total disk storage systems capacity amounted to 6,037 petabytes. This translates into a growth rate of 20.8% year on year.
These results appear relatively good despite concerns over decreased corporate IT infrastructure spending. The research firm cited that strong growth in emerging markets and the slowdown in price per gigabyte helped boost the growth rate.
The data also clearly showed the dominance of EMC (EMC) in the Network-Attached Systems (NAS). EMC led the NAS market with a share of 29% in the first quarter. NetApp (NTAP) came in second place with a market share of 14%. IBM (IBM) landed in third place with 11.4%, while Hewlett-Packard (HPQ) and Hitachi have market shares of 10.2% and 9.4%, respectively.
The NAS market prospects are good. NAS is one of the online storage architectures that deliver cost-effective alternatives to the growing data requirements of corporate entities. Its advantages include increased data availability, optimized data access, end-user transparency, easy setup, low installation costs and improved server performance.
These advantages bode well for small businesses, given its relatively low cost to install, as well as better server performance relative to other network infrastructures. The demand will most likely come from small businesses, as there is a growing need for business continuity and adoption of remote and virtual office environments. However, there are other large enterprises that use the NAS infrastructure for less critical applications and processes.
Innovations such as cloud computing will also benefit the NAS market in the near term. Cloud computing will definitely expand the functionalities and increase the market opportunities in this space. The key merit for the Cloud NAS is its ability to retrieve information without limitations on the physical location of the data. As enterprises are looking at relatively low cost effective storage infrastructure, the adoption of Cloud NAS is something to watch in the future.
Concerns over IT spending will fizzle out
There are still pressures with decreased corporate IT spending, given the uncertainties surrounding Europe. Based on a research report by JPMorgan (JPM), global IT spending is expected to be lower in 2012. Analysts at JPMorgan lowered their growth forecast for global IT spending to 2.2% compared to its earlier forecast of 3.8%. The firm cited the absence of incremental economic stimulus activity in China, as well as macroeconomic uncertainties in Europe and United States. It also believes that the potential turnaround from this scenario is not visible.
In a separate report, research firm Gartner forecasted that computing hardware spending will grow 5.1% this year. This is slower than the expected growth rate of 7.6%. It also cited slowing global economic growth, the European debt crisis and the impact Thailand's floods have taken a toll on the outlook for IT spending.
The information storage business is the bread and butter for EMC. It constitutes more than 40% of its revenues. Other businesses like desktop and server virtualization software are a future growth driver for the company. However, I believe that the information storage will drive the company's value in the short to medium time frame.
EMC's global storage market share will continue to grow
The market share of EMC in the global storage market will increase significantly over the next 5 years. The share in storage market has increased to 29% coming from a market share of 24% in 2011. It continues to acquire smaller names in the global storage space. The recent acquisitions of Syncplicity and XtremeIO strengthen its position in the cloud computing space and file information management. The XtremeIO acquisition is a bet on the future of flash memory.
I expect EMC to cement its position in this space with more acquisitions this year. The company has net cash of almost $5 billion. It also has an operating cash flow of $6.22 billion a year.
Another indicator that EMC will be able to maintain its market leadership is that Barclays has recently downgraded its competitor Netapp. Barclays cited increased competition will dampen NetApp's prospects as storage buyers have indicated their interest in EMC's Isilon product line with the product upgrade this fall. The bank said that this will ultimately result in lower earnings guidance for NetApp moving forward.
The company has a good track record based on its past financial performance. Over the past 5 years, EMC has seen its sales grow by 12% per year. This translates into earnings growth of 15% during the same period. The net margins appear stable at 10% and return on equity at 11%.
Analysts expect the company to earn $1.74 per share. This implies a growth rate of 14.90% compared to the same period last year. Over the next 5 years, the company is expected to grow its earnings by 14.7% a year.
The current price implies a 14 times 2012 earnings. This multiple does not appear cheap. However, this is lower than its 5-year average price earnings ratio band of 17 to 33 times. Relative to its growth prospects, the stock appears cheap. Its price earning to growth ratio is at 0.97 times. The market is clearly discounting the growth prospects due to the short term headwinds that the industry is facing.
In contrast, NetApp is valued at 19 times 2012 earnings. Other similar stocks such as IBM and Hewlett-Packard trade at 15 times and 8 times earnings, respectively. As the short term prospects for EMC remain weak, this will not help EMC's share price. Over the long run, the outlook for NAS devices remains positive as it is expected to hold up for the year. Strong future growth will come from Asia, although North America remains a largest market for the industry.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.