EMC's Perception Problem

June has been a tough month for tech stocks, but none of the mega-cap issues have done as poorly as EMC(EMC). The storage giant is off 13% this month, while even Intel(INTC) and Dell(DELL), battered by competition and strategic missteps, have fared better.

Sadly for EMC shareholders, June has not been anomalous. The stock is off 17% so far this year, and 20% since March, when the company posted a somewhat disappointing first quarter. EMC's cause wasn't helped this month when CFO Bill Teuber frankly told analysts and investors that the company "still has a lot of work to do" to hit June-quarter targets. Making matters worse was CEO Joe Tucci's equally frank statement that CIOs don't seem to be spending all of their budgets this year.

Investors have a long list of concerns about the company. They were disappointed that guidance didn't go higher this month, they worry about competition from Network Appliance(NTAP), and they're afraid that the "uptake" of the latest version of the company's flagship Clarion product is too slow.

Is EMC getting the treatment it deserves? Maybe not. It's not hard to find sentiment on Wall Street that there is something of a disconnect between EMC's fundamental strength and its low valuation by the market. "I'm struggling with this," says Sushil Wagle, an analyst with the Seligman Technology Group, a holder of EMC shares. "There's my logic and my math. But maybe the market is trying to tell me something I don't quite understand."

His puzzlement is understandable. Consider the company's growth over the past two years, says Punk Ziegel analyst Steve Berg. At the end of the first quarter of 2004, the company posted revenue of $1.87 billion, non-GAAP EPS of 6 cents, gross margins of 50.1% and operating margins of 9%. Two years later, revenue had grown 36% to $2.55 billion, EPS to 16 cents, blended gross margins to 53.9% and operating margins to 17.3%.