Recently I have written a couple of articles about the explosive growth of digitally stored data, and various ways that an investor can ride this trend.
A quick summary of some interesting points:
- By 2020, only 8 short years away, globally stored data will grow by 4300% from 2009 levels. (That is not a typo!)
- The Market for "Big Data" Analytics software is growing at about 10% per year, which is considerably faster than the traditional software market.
- In recent years software powerhouses Oracle (ORCL), IBM Corp (IBM), Microsoft (MSFT) and SAP AG (SAP) between them have spent more than $15 billion on buying software firms specializing in data management and analytics. Clearly they are taking this trend seriously.
- Besides analytics, there is also just the sheer exponential growth of data. Recently I highlighted the hard drive maker Seagate (STX) as a good way to play this trend. IDC has forecasted that the HDD industry specifically will continue to grow at a CAGR of 9.6% until 2016, despite the rise of more energy efficient and better performing SSDs. Growth continues because simply there is just not enough storage of all flavors to keep up with the data volume explosion.
So with these thoughts in mind, I still think one of the most solid picks to play this trend is EMC Corp (EMC). Here are 5 positive reasons that I think the company is worth a deeper look:
- A King of the Storage Market- EMC is the largest provider of data storage platforms in the world. This gives the company a long standing advantage for big storage platforms. The company also covers very nicely small and medium businesses as well as the enterprise. The Information Storage unit which consists of about 70% of revenues has grown 16% from 2010 to 2011 and 19% from 2009 to 2010. This is considerably faster than other areas of IT spending and underscores how important the data revolution is. Also with the recent acquisition of Greenplum in 2010, the company is a major player in the Big Data arena. The market is crowded, but Greenplum is currently 5th or 6th in revenue. Expect some consolidation in the industry overtime. Clearly growth is accelerating though, as the market is expected to grow at a CAGR of 58% in the coming 5 years: (click to enlarge)
- Grab the growth of VMWare for half the price - EMC owns 80% of the virtualization specialist VMware (VMW). Virtualization has been growing at double digit growth rates for several years. Revenues grew 32% from 2010 to 2011. Although rates have slowed, I can tell you as an IT professional that the demand for data center virtualization as an enabler for technology such as private clouds will remain a key trend for years to come. With VMWare trading at an EV/EBITDA of 34, and EMC only at 9.80, this seems like a great way to get exposure to the virtualization company without paying for very high anticipated growth.
- The Company is conservatively Financed - With more than $5.5B in cash, and a total debt/equity ratio of only 0.08 the company is in excellent financial health. This also leaves additional room for acquisitions, which the company has done very successfully over the years. EMC has bought more than 50 companies since 1996, which has led to strong consistent growth. In fact earnings have increased nearly five-fold from 0.22/share to 1.10/share in the past 10 years.
- Margins are significantly better than Industry Averages - One of the factual ways to be sure that a competitive moat exists in a business is when the margins are much better than the industry average. EMC has a gross margin of 62% and an operating margin of 18%. This blows away the overall industry, which has margins of only 18 and 8% respectively.
- Valuation - With a forward P/E of only 12.78 and a 5 year growth rate projected at nearly 15%, EMC seems to be attractively priced. Looking at a simple DCF analysis, if we assume on average of 10% EPS growth in the next 10 years, a discount rate of 6%, and 0% terminal growth there is an intrinsic value of about $44/share. Personally I would then reduce this figure another 25% to account for earnings uncertainty, and arrive at a valuation around $33/share. With a current price of $24.54, there is some margin of safety in the shares.
EMC is a decently priced company which has many years of excellent growth ahead of it. As I've mentioned in several other SA articles, I believe that the exponential growth of data storage in the coming decade is so phenomenal that any logical investor should make sure to have exposure to this in his or her portfolio. EMC should prove to be a fine choice to do this.
Disclosure: I am long MSFT.