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) - Get Report and Dell (DELL) - Get Report, 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) - Get Report

, 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%.

And the solid growth is expected to continue. Analysts polled by First Call expect EMC to grow full-year revenue by nearly 29% over the next two years. EPS, meanwhile, is expected to grow from 56 cents this year to 87 cents in 2008.

Yet the company is now trading at 20 times forward-GAAP earnings (or 16 times non-GAAP EPS), down from 33 times non-GAAP earnings two years ago. And on a GAAP basis, the P/E for 2007 is just 16 times earnings. Punk Ziegel does not have an investment banking relationship with EMC.

Tucci's acquisition strategy has rapidly transformed EMC from a pure-play vendor of storage hardware into a hybrid with more than one-third of its revenue derived from software. VMware, for instance, acquired by EMC in early 2004 for $625 million, will likely post $600 million in revenue this year, the company says. "You have to call that acquisition a home run," says Stein Rowe analyst Chuck Jones, whose company has a long position in EMC.

EMC's content-management business, acquired via the $1.7 billion purchase of Documentum, produced $434 million in revenue last year; Goldman Sachs analyst Laura Conigliaro figures it will grow 48% this year to $643 million. And the core storage business likely will grow by 12.5% to $9.4 billion, a bit slower than last year's pace of 14.9%, she says.

EMC continues to lead

Hewlett-Packard

(HPQ) - Get Report

,

IBM

(IBM) - Get Report

and everyone else in the external-storage market, holding a market share of 21.4% in the first quarter of calendar 2006, according to IDC analyst Brad Nisbet.

The company generates huge amounts of cash, says Wagle. Free cash flow from operations will be $2.8 billion this fiscal year and $3.1 billion in 2007. And EMC's net cash balance equals $3.50 a share, or 31% of Tuesday's closing price of $11.18 a share, he adds.

Given all of those pluses, why is the stock doing so poorly?

"The implication of the lower P/E is that people don't believe next year's numbers," says Chirag Vasavada, who follows EMC for T. Rowe Price.

Certainly the company's analyst day in New York earlier this month was a chance to make believers out of the skeptics. But it only reiterated second-quarter guidance when Wall Street was hoping for a boost. "The stock is struggling with an expectations mismatch," says Vasavada.

Part of the problem the company faces is this: The competitive environment has gotten tougher. Network Appliance, for one, is aggressively moving against both H-P and EMC, says Nisbet. NetApp is moving into high-end territory to compete with EMC's Symmetrix line and has an alliance with IBM "that will give them a greater ability to reach into the data center," he says. At the moment, IBM is mainly reselling lower-end NetApp products, but Big Blue now has the right to resell anything that NetApp makes.

And H-P's once-feeble storage business has revived and is again a formidable competitor.

Although Tucci has said that he expects to make only smaller "tuck-in" acquisitions in the foreseeable future, there is some concern on Wall Street that he won't be able to resist the temptation to use some of his company's $7 billion in cash to make a sizable purchase, says Seligman's Wagle. A better use of cash, the analyst says, would be an accelerated buyback of shares. "If they can cut the share count by 30% they would be able to beat estimates by three or four pennies," he says.

Two better-than-expected quarters would fix much of the perception problem, says Vasavada. Failing that, he believes the company should "reset" expectations by lowering guidance to a number it can meet or exceed. In the short run, he says, that would be painful. But longer term, it would end the mismatch of expectations and likely allow the stock to appreciate.

Will EMC deliver a solid June quarter? Goldman's Conigliaro thinks it well may, even though the quarter is heavily skewed toward the final weeks. "EMC stands a good chance of being able to hit its targets for the June quarter," she says. As to Tucci's remarks about the spending environment, Conigliaro says, "EMC is getting punished for generic comments that should already be well-understood, as well as applicable to a much broader part of the enterprise space." Goldman Sachs has an investment banking relationship with EMC.

In the absence of significant news, it's likely that the stock will drift between now and the company's second-quarter earnings report on July 20. If Tucci & Co. can deliver an upside in June, or better-than-expected third-quarter guidance, look for some recovery. If not, it will take longer for this stock to come back.