EMC: Can It Maintain Supremacy?

| About: Dell Technologies (DVMT)
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After posting improved results in the last quarter of 2012, EMC (EMC) didn't have much to bolster about. Analyzing on the year-over-year basis, the company has managed to set its total revenue around $5.5 billion levels.

What caught our attention was its international infrastructure business segment; it contributes approximately 26% of the company's total revenue as of the second quarter of this year. The information storage section of this segment is bolstering revenue growth opportunities with the launch of its new VNX series storage device.

EMC launches new storage device

In the first week of September this year, EMC launched its new VNX product line heir, VNX2. It's an easy to run unified storage system that manages files and applications through a single device. This means significantly less hardware, and it doesn't require a separate storage platform. Additionally, it will be priced around $20,000 in order to compete with its competitors like Hewlett-Packard (HPQ), and NetApp (NTAP). These two companies have competed heavily with EMC in terms of pricing. When EMC launched its VNXe model for $10,000 two years back, it claimed it to be the cheapest on the market. Within a span of 11 months, NetApp introduced its FAS2240 model, priced around $7,500. VNX2 will compete with HP's StoreServ (3PAR) solution, which has a price range starting below the $20,000 mark. With this launch too, EMC will face price competition, but it has better reporting software in terms of user-friendliness when compared to HP's 3PAR series. This makes VNX2 a notch better than 3PAR despite its competitive pricing.

As a leader in this market, EMC had a market share of 47.9% last year according to Gartner's report. It shipped over 71,000 VNX arrays in the same period. Through VNX2, we believe EMC will hamper the markets of both these companies, and will continue to sustain its No.1 position in this market.

NetApp slips after its upside streak

Post the launch of VNX2, things are expected to get more difficult for NetApp, which is also facing other fundamental problems. One of these is the huge possibility of its partnership with Cisco (CSCO) changing into an acquisition by the latter company acquiring the former one. In recent years, NetApp has been a target for acquisition by many big cash rich companies like IBM (IBM) and Oracle (ORCL). It would be a good opportunity for Cisco, as NetApp offers a huge foot into the storage market, but it can also lead to a negative impact on its relationship with its hardware vendor EMC.

In line with the above acquisition possibility, the other negative fundamental hurting the company's image is the departure of a few of its executives. The biggest loss is Mr. Manish Goel, the company's executive vice president of product operations. He is the second executive to leave, following Mr. Vaughn Stewart, the director of technical marketing. We believe this is a warning sign for NetApp that challenges its innovation expertise and strategic capabilities. After its long upside rally, where it grew by nearly 25% on year-to-date basis, NetApp's market price is feeling the heat. Post the above developments, it started a downward trend, already posting a decline of 2% since September 19. This makes its stock price returns questionable in the short-term.

Valuations - a mixed bag

To get a complete picture of EMC's stock, we have compared it with its industry peers like NetApp and HP. First, let's consider the price-to-book, or PB, ratio, as it will help to find out which company stands fundamentally strong. Here, a low ratio is considered a good valuation. The PB ratio of EMC, NetApp, and HP stand at 2.42 times, 3.67 times, and 1.67 times respectively. This reflects that HP is highly undervalued when compared to its peers. When comparing these companies with the industry's PB, which is at 4.6 times, HP is found to be too undervalued, which is not a good sign, reflecting fundamental issues. It also has a negative return on equity of 11.07%. Additionally, the company isn't earning enough return on assets. HP has the lowest return on assets ratio of 4.98%, while EMC and NetApp stand at 6.52% and 8.17% respectively.

The other ratio we are presenting is price to sales, or PS, ratio. Similar to PB ratio, 'the lower, the better' rule is applied here also. The PS ratio of EMC, NetApp, and HP are 2.45 times, 2.29 times, and 0.36 times respectively. It is also necessary to consider the debt factor here; to repay debt, a company might issue equity, which will lead to expansion of its market cap. On a year-over-year basis, NetApp and HP both reduced their debt significantly. NetApp reduced its total debt by nearly 18% and HP by 17%. On the other side, EMC increased its total debt from $1.7 billion from the July ending quarter last year to $7.1 billion in the July ending quarter this year. This was mainly to repay its $1.7 billion convertible debt, which matures in December this year, and for its share buyback authorization worth $6 billion for the coming two years. This makes NetApp and HP highly attractive growth stocks in terms of valuations. Still, the negative fundamentals of NetApp don't provide further support for any upside in its stock price.


With the launch of VNX2, we do not see any headwind situation that will hamper EMC's market share in the unified storage market. The company's valuations are simply mediocre. Still, when compared to the industry standards, it tends to push investors to invest in this company. With a return on equity of 12.77%, compared to industry's 12.2%, we believe the company will post better results in the remaining quarters than it did in the first half of the year.

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.

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Rohit Gupta, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.