Time to Buy and Store EMC's Profit Potential

NEW YORK (TheStreet) -- EMC (EMC) investors are surely disappointed. With only moderate improvements expected in enterprise IT spending, 2014 may not pan out the way they imagined.

This really chafes coming off a 2013 that saw the stock underperform a perennial storage laggard like Hewlett-Packard (HPQ).

EMC is still the clear-cut leader in the storage business among rivals like NetApp (NTAP) and IBM (IBM). Despite a strong history of dominance, the Street assumed EMC was immune to poor macro conditions. That's simply not the case.

The good news is that it's still early. Based on the results from rival enterprise powers like Oracle (ORCL) and Cisco (CSCO), EMC is not alone in its misery. (That's not meant to be an endorsement.)

A distinction needs to be made with companies that are known for self-inflicted wounds. The idea that EMC is losing its hold in the storage sector, despite its fourth-quarter beat in both revenue and profits, seems overdone.

EMC posted fourth-quarter revenues of $6.68 billion, good enough for a 1% beat, according to some estimates. Admittedly, 11% year-over-year growth is about 5% shy of what EMC has been accustomed to.

Amid the growth obsession, on a segmental basis, the Street discounted how strong EMC is actually performing in its bread-and-butter storage business. Management accelerated growth 10% year over year. Even more impressive was the 73% year-over-year surge in the company's Emerging Storage business.

The RSA Information Security segment and Unified and Backup Recovery business are also producing double digit successes.


I'm not saying this is the same EMC that we saw at the height of the "Big Data" craze two years ago. Nevertheless, the Street needs to consider how the company could have performed so strongly in perceived weak segments while at the same time losing market share. It can't be both. And it would serve investors well to become a bit more realistic about the current macro conditions.

On the operating side, I don't see how anyone with an ounce of understanding of the storage industry can see the company's GAAP earnings of $1.02 billion as anything less than a solid number. This amounted to 48 cents on a per share basis, which easily beat the year-ago mark by 23%. Management did its job. What am I missing?

Investors have every right to turn sour on storage industry. But in the context of "bad to worse," this company is only a couple of quarters removed from posting just 6% revenue growth and merely in-line results.

Today, I see a company that continues to adapt to changing trends. EMC's improving product cycles and growth capabilities give investors plenty of reasons for optimism, especially since the total available market for Big Data is projected to grow to $17 billion by 2016.

I believe that here is no company better positioned to capitalize on a recovery in IT spending. With the stock trading at around $25 per share, there's at least 20% of upside to these shares in the next 6-to-12 months.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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