EMC: Buy Now For Max Gains In 2013

| About: Dell Technologies (DVMT)

EMC (EMC) is the top provider of disk storage systems in the world. The company has a market share of nearly 30%, followed by Hewlett-Packard (NYSE:HPQ), which has a market share of 18%, and IBM (NYSE:IBM), whose market share is 16%.

EMC has a current P/E ratio of around 21, a premium to the 17.7 of the average of its peers. In 2012, EMC is expected to earn $1.43 per share, which means that its forward P/E ratio is about 20, still relatively higher than the industry average of 14. Though EMC's valuation does not look very attractive, the company demonstrated strong earnings growth over the past couple of years. The company has seen consistent growth over the last 12 quarters. Over the past five years, EMC's EPS grew at an average of above 15% annually and we expect this trend to continue in the future. Analysts expect EMC's earnings to grow at about 16% per year over the next couple of years. The high growth expectation is reflected in its stock price and explains the relatively high P/E ratios.

Dell (NASDAQ:DELL) and Hewlett-Packard are each beefing up efforts to capitalize on the growing cloud computing market. Dell recently purchased Quest software in an effort to transform itself into a services providing company. But its market share is currently so poor that it offers no threat to EMC. Hewlett-Packard is also aiming for more sales in storage, but the company is in worse shape than Dell in this area.

EMC has been active in acquiring other firms and expanding its business. The company employs a broader strategy of growth through acquisitions. During the past 16 years, EMC has made around 48 acquisitions. One of its most successful acquisitions was the purchase of VMware (NYSE:VMW) for a total of $635 million in 2003. Today, VMware is operated as an independent subsidiary and EMC owns about 80% of its equity. I believe EMC will continue to benefit from its majority ownership of VMware as we see strong growth potential in cloud computing and virtualization software. Based on its current price, the market is grossly undervaluing EMC's acquisition of VMware as it is a leader in the cloud computing market. EMC will see significant growth as cloud computing becomes more and more popular. Another successful acquisition made by EMC recently was the purchase of Data Domain in the third quarter of 2009 for a total of $2 billion. This acquisition significantly improved EMC's backup and archive solution products based on technology.

More recently, the company just announced that it was acquiring Silver Tail Systems. This is a privately held company that specializes in detecting fraud on the Web. Banks and insurance companies and Web commerce companies use it to keep track of incoming traffic to their sites in real time, and to distinguish good traffic generated by normal customers from bad traffic generated by criminals probably trying to do bad and shady things that more than not break the law. One of Silver Tail's biggest clients is Citigroup (NYSE:C). It is a growing company that will help EMC diversify and grow into the security field.

As I noted earlier, EMC has the leading market share in providing disk storage systems. The company will continue to gain additional market share going forward. At the end of 2010, EMC acquired Isilon Systems (ISLN) for $2.16 billion in cash. The acquisition of Isilon has enabled EMC to increase its presence in the small and medium-size businesses segment. As this further develops EMC will see more growth in market share. The company will also gain market share through its broad hardware and software offerings and its new products in data storage and backup, not to mention it's newly found presence in the data security market.

One of the major competitors of EMC is NetApp (NASDAQ:NTAP). This company is losing its growth potential as EMC has become more aggressive in its pricing recently introduced its unified architecture data storage systems. NetApp saw tremendous growth as a mid-cap stock but I believe that as it continues to try and draw market share away from EMC it will prove too difficult. EMC has the built in advantages of its engineering prowess and its ability to unify all of the data storage architecture - something customers increasingly want to see as the cloud computing craze grows.

I like EMC and expect the stock to grow nicely in 2013. The growth in the data storage market shows no sign of declining, and EMC is the clear market leader. The growth in electronic record keeping means the demand for data storage will continue to be strong. As the leading provider of data storage solutions, EMC will definitely benefit from the growing demand for data storage product and services.

I also think EMC's geographic reach puts it in a strong position going forward. In 2011, non-U.S. markets contributed to 47% of EMC's total revenue. Investors can simultaneously gain exposure to foreign markets and protect themselves from a decline in U.S. dollar through EMC. In addition, EMC's diversification into data security systems will reward investors with strong dividends in 2013. As the cloud computing market continues to expand, so will customers of data security systems. EMC is positioned to be able to seamlessly integrate its data storage architecture with its data security systems. A situation that will see an increase in market share going forward.

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.