Is EMC Broken?

The demigod has been pulled to Earth, and it shouldn't be a surprise that this mere mortal bleeds like anyone else.

EMC Corp.'s (NYSE: EMC) stock price in the past week has fallen to a five-year low, adjusted for splits. It's currently trading at around $4. EMC's market cap of around $8.9 billion values the company at just more than 33 times analysts' estimates for its 2003 earnings of 12 cents per share.

"The current [EMC] multiple compares to pre-bubble (prior to 1999) multiples of 10X and 35X," wrote A.G. Edwards analyst Shebly Seyrafi in a recent note to investors. The firm has maintained a Hold rating on EMC. Meanwhile, Mark Kelleher at First Albany Corp. last Friday downgraded EMC from Strong Buy to Neutral. "EMC has a strong franchise, and $2.50 per share in cash," he writes. But "without better confidence in the IT spending recovery, EMC stock will have difficulty appreciating, in our view."

Bear Stearns & Co. Inc. analyst Andy Neff suggests that EMC has lost its edge: "Some customers think EMC is still ahead but that the gap [between EMC and its competitors] is narrower than it was one/two years ago and are willing to consider other vendors," he wrote in a research note.

In other words, Wall Street is saying: The glory days are over in Hopkinton.For sure, things are grim at the moment, for both EMC and the industry as a whole. Wall Street's declining confidence in EMC follows the revelation that... well, the market for storage really, really blows right now. EMC last week said it would have a larger-than-expected loss and that it plans to cut another 1,350 jobs (see EMC Cuts Headcount).

So, has the "storage bubble" finally deflated, and is EMC getting its just desserts? Is this company dying the death of a thousand cuts?

The storage bears (or chicken littles?) say this: The era of EMC charging customers millions of dollars for high-end RAID storage is ovah, baby. IT spending is in the toilet. Disk is a commodity. See ya, EMC!

Well. The spanking EMC is receiving seems very shortsighted, indeed. I would argue that EMC's best days may yet lie in the years ahead. Why? Because the universe is still expanding.

Let me explain. Right now, budgets for storage and every other major capital expense, for that matter – are frozen. But corporations generate more data every single day. Plus, a surprising amount of data still isn't stored electronically. At some point, businesses and government agencies will be forced to buy more disk space; it's just that for the time being they're mostly getting by on the storage they have already installed.In this regard, EMC may be reaping what it has sown. The storage vendor is "guilty of the largest over-provisioning in history," charges Steven Murphy, president and CEO of Fujitsu Software Technology Corp. (Softek), in our recent interview with him. Regardless of whether a storage glut does or does not exist, sales of storage subsystems inevitably will start to go up instead of down.

What about concerns that disk is becoming a commodity and margins are eroding? Yes, of course this is happening. But companies are still going to pay a healthy premium to make sure their most critical information is stored on fast, reliable media – and low-cost storage technologies like Serial ATA will not be ready for the data center for at least two years or more.

The preliminary results of Byte and Switch's survey of storage buyers show that the two top purchasing criteria are performance and high availability. Storage can't go down, and it can't be slow. (We'll be presenting the full results of the survey in a live Webinar on Oct. 22; click here for more information.) And remember that at the lower end of the market, EMC has a very strong partner in Dell Computer Corp. (Nasdaq: DELL).

Once storage spending comes back, EMC will still be the leading provider of networked storage systems. True, it doesn't have an unassailable market position. In fact, according to IDC, Hewlett-Packard Co. (NYSE: HPQ) recently overtook EMC as the overall market share leader in external storage, although this was through brute force (i.e., acquiring Compaq – see HP Tops Storage Charts, IDC Says).

I'm not saying EMC hasn't been cut down to size. Obviously, it has (and will continue to be as another 1,350 staffers get pink slips). But that doesn't mean it's dying. Long term, EMC does have a viable – even, perhaps, rosy – future as the company best positioned to capitalize on the steadily growing need for disk, as well as the transition from direct- to network-attached storage.That is, unless the universe stops expanding. And then we will all be in trouble.

— Todd Spangler, US Editor, Byte and Switch
http://www.byteandswitch.com