International Date Storage released a "Storage Tracker" report tracking different vendors across the market. It said that EMC's (EMC) market share in the external disk storage has increased compared to the previous year. According to the data released, EMC is up by 30.4% compared to the prior year's market share of 28.7%. In contrast, its competitors have reported market share losses. International Business Machines (IBM) reported a decline in market share to 12.9%, from its 13.7% share last year. Netapp (NTAP) also reported a slight decline of market share from 12.8% to 12.1%. Another technology stalwart Hewlett-Packard (HPQ) has a market share of 10.7%, down from the previous market share of 11%. Notable is the market share of Dell (DELL) of 7.8%, which emerged from the "Others" category.
The total external disk market has revenues of $6 billion for the quarter. This implies a growth rate of 6.5% year-on-year. On a year-on-year basis, this growth rate appears relatively better, notwithstanding the difficult operating environment. The relatively modest growth is due to the strong demand in emerging markets, as well as increased demand for mid-range systems. Meanwhile, entry level systems were hit the hardest from their reliance on SATA and near-line SAS, which experienced price hikes from the Thailand floods. Looking at this chart, it seems that EMC has steady growth but not as spectacular from the previous quarters. It also showed that IBM has mixed growth, while HP has consistent growth for the last few quarters. On the other hand, Dell shows a decline for the period. Moving forward, I expect that EMC will remain the leader of this segment considering its wide margins over its competitors. Its competitors are also big technology giants that have wide business scope. This gives EMC a significant advantage as a niche player in this segment. EMC's share in this market will remain consistent and expected to increase as it plans to expand its current software openings.
Cloud Computing as the Key Driver to Future Growth
Based on the research firm IDC data, public IT cloud services will reach $72.9 billion in 2015. This equates to a compounded annual growth rate of 27.6%. This is higher than the projected revenue growth of the entire IT industry. The worldwide IT market is expected to grow by 6.7% for the same period. It noted that cloud computing will be a significant component in the IT industry, which would help transform other sectors within the industry.
Given its current leadership position, this market represents a good opportunity for EMC. It could tap familiar clients who are in the process of transitioning to the cloud. The market is even bigger if you include the potential of VMware (VMW). This is something that the market has not yet really priced in.
VMware will also be a major component that will drive EMC's valuations higher. It operates in two key areas: server virtualization software and desktop virtualization software. The server virtualization software provides companies the ability to increase the usage of its servers in a manner that is independent of its underlying operating system. Meanwhile, desktop virtualization software allows its clients to execute multiple operating systems on a single desktop.
Over the last few years, VMware remains the leader in the virtualization software. It still has the ability to command higher prices given its strong competitive position. The downside risk is that several technology giants in the likes of Microsoft (MSFT) and Oracle (ORCL) have aggressively expanded into these markets. The resulted in lower market share for VMware to 45%, lower than the 50% market share in 2005. Going forward, its market share will continue to decline from increased competition and aggressive pricing from its competitors. Despite these negative factors, VMware will remain the leader in the visualization market.
Of course, the company is doing its best to maximize its overall profitability. For instance, it recently planned a corporate restructuring and hopes to spin-off its service platform and Greenplum assets into another entity. This will allow the company to compete with Google (GOOG), Amazon (AMZN) and Microsoft in the Platform-As-A-Service space. These players have already started to build out infrastructure and platform layers to become the IT departments for developers and enterprise customers.
VMware is expected to post revenues of $4.5 billion this year. For the next few years, revenues are estimated to grow to $9.2 billion, more than double from the current year. Assuming a net profit growth of 30%, this would translate to net profit of $1.35 billion for the current year. If VMware would be valued at Oracle's earnings multiple of 16 times, VMware will be valued at $21 billion. This already equates to 37% of EMC's current market cap. Investors looking at the business on a longer perspective should find these developments comforting. If we run the $9.2 billion revenues, its valuations would exceed $40 billion, or near EMC's current market cap. Thus, it is safe to assume that the market has yet to discount other businesses such as the storage business.
EMC is forecasted to post earnings per share of $1.72 this year. This is an increase of 13.90% compared to the previous year. Analysts are optimistic over the company's prospects with estimated growth rate of 15% over the next 5 years. At these forecasts, this translates to forward price earnings ratio of 14.5 times. Historically, this is lower than EMC's average price earnings ratio of 23.8 times for the last 5 years. The stock also trades at 2.8 times and 9.5 times cash flow.
These valuations appear undemanding. It has a price over growth (PEG) ratio of 1.1 times. Investors are stingy when it comes to paying up for a market leader such as EMC. In contrast, Oracle trades at 16.7 times earnings and has a PEG ratio of 1.2 times. Microsoft is valued at 15 times earnings and has a PEG ratio of 5.7 times.
I believe that these valuations do not reflect EMC's prospects. The market has not priced in its cloud computing prospects given the uncertainties in the IT industry as a whole. It faces headwinds such as increased competition. But, there are lots of reasons to believe why EMC will remain a market leader in its field. As soon as these headwinds disappear, it should trade at its historic highs.